BUY Baobab Resources Plc (BAO)

This document is a marketing communication and is not independent research prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to a prohibition on dealing ahead of the dissemination of investment research. Whitman Howard does and seeks to do business with companies covered in this research report. As a result, investors should be aware that Whitman Howard may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see disclaimer for further information.

Baobab Resources Plc (BAO) Pig iron and ferrovanadium from Mozambique

Baobab is developing its 85% owned Tete pig iron and ferrovanadium project in Mozambique. Pig iron is a growth market and is a beneficiary of increasing scrap demand, while ferrovanadium is likely to see increased demand due to increased Chinese regulation aimed at offering stronger reinforcing bar for the construction industry.

Encouraging 29% Internal Rate of Return (IRR) and US$2.9bn Net

Present Value (NPV), assuming a 10% discount rate

As the local tax regime is under negotiation, only pre-tax numbers were estimated in a compliant Pre-Feasibility Study that modelled a 2 million tonne per annum pig iron production scenario. Other strategic Mozambiquan projects suffer only a 1% turnover tax.

Well-endowed with local infrastructure

This large vanado-titano-magnetite resource is located in the Tete coal province; not only is waste coal readily available, there is a surplus of electricity and water and the rail link to port may be better suited to pig iron, rather than bulk metallurgical coal.

Strategically Important for Mozambique

Not only does this local infrastructure offer strategic advantages, the country’s steel demand is about to grow significantly, owing to growth in the natural gas industry. It is logical for this steel to be produced locally.

World Bank and Development Bank project support?

The International Finance Corporation, a World Bank affiliate owns 15% of the project already and is a significant shareholder in Baobab, while Standard

Chartered (STAN) has recently been appointed strategic corporate advisor.

Baobab is cheap in relation to its share of project NPV

At a share price of 17 pence per share, or a market capitalisation of £50.7m and assuming £2.7m of remaining cash, Baobab trades at a 94% discount to its share of the project’s after-tax NPV. This assumes a 50% project tax take, probably two thirds more than should be anticipated. This also assumes nil value for their other Mozambiquan projects.

Initiation Report

WHITMAN HOWARD GLOBAL EQUITY RESEARCH 19th June 2013

Mining Sector

BUY

Current Price (19/06/13): 17.00p

Market Capitalisation: £51m

52 Week Range: 6.12 - 36.50

Roger Bade - Mining Analyst

+44 (0)20 7087 4578 [email protected]

Neil Pidgeon - Mining Sales

+44 (0) 20 7087 4577 [email protected] Richard Morecombe

Head of Equities +44 (0)20 7087 4552 [email protected] John Tracey

Institutional Equity Sales +44 (0)20 7087 4565 [email protected] Myles Brockbank

Institutional Equity Sales +44 (0)20 7087 4572 [email protected] Chris Morris

Institutional Equity Sales +44 (0)20 7087 4566 [email protected] Araminta Lowes

Institutional Equity Sales +44 (0) 20 7087 4571 [email protected]

0

10

20

30

40

01/05/2012 01/05/2013

Baobab Share Price

mailto:[email protected]

mailto:[email protected]

19th June 2013

www.whitman-howard.com 2

Baobab Resources Plc

Summary

Baobab is developing its 85% owned Tete pig iron and ferro-vanadium project in the Tete province of Mozambique. The World Bank affiliate, the International Finance Corporation (IFC), holds a 15% participatory interest in the project and is a major Baobab shareholder.

Pig iron is a raw steel material derived from the intermediate smelting of iron ore. It is used alongside scrap iron in electric arc furnaces (EAFs) to generate crude and finished steel products. The global consumption of pig iron is estimated at about 70 Mtpa (including the domestic Chinese market), complementing the roughly 350 Mt annual consumption of scrap iron.

Due to its consistent chemical composition and density, pig iron is considered a superior product and typically trades at a premium to scrap iron. Pig iron prices vary between markets, with North America typically reporting the lowest prices and Asia, in particular China, reporting the highest. Current pricing ranges from $420/t to $500/t.

In Joint Ore Reserves Committee compliant Preliminary Feasibility Studies (PFS) initially a 1Mtpa pig iron production scenario has been modelled over a 37-year mine life, which resulted in the development of 110 million tonnes (Mt), just 15% of the total 725 Mt compliant resource. Subsequently a 2 Mtpa production scenario modelled a 22 year mine life scenario and used just 20% of the resource, thus illustrating that the current resource could easily support a 5 Mtpa scenario.

The 2 million tonne per annum (Mtpa) pig iron project costs an estimated US$1,981m up front. Assuming a pig iron price of $450 per tonne (/t) and $35,000/t for ferro-vanadium, they estimate, a pre-tax IRR of 29% and a pre-tax NPV of $2.9bn, assuming a 10% discount rate.

The outlook for pig iron is tempered by the current poor outlook for iron ore and steel. The growth of EAF production is forecast to drive growth, but the market may have to absorb growth in competing US Direct Reduced Iron production, which will lead to a fall in pig iron demand.

The outlook for ferrovanadium is equally mixed, with strong growth forecast as increased Chinese specifications for re-enforcing bar for the construction industry, drive demand. This growth potential doesn’t explain current weak prices, particularly as the market which moved into shortfall last year, is forecast to remain undersupplied for the next five years.

This project has considerable strategic importance for Mozambique, with considerable developing steel demand for the various natural gas developments contemplated. Furthermore, the project is surrounded by waste coal owned by major existing global steel makers, with surplus electricity and water, while current rail infrastructure is more favourable to the transportation of value added pig iron, rather than bulk metallurgical coal.

Hence multilateral and global steel producer funding is likely to be forthcoming for such a development. In the meantime Baobab trades at

19th June 2013


almost a twentieth of the project’s after-tax Net Present Value and that assumes a 50% tax rate, which is two thirds more than the statutory Mozambiquan level.

PFS on a 1 million tonne per annum pig iron scenario

With an up-front capital cost of $1,143m, $1,010m for the pig iron plant and $133m for a ferrovanadium plant, the company has modelled in a compliant PFS the production of 1 million tonnes per annum (Mtpa) of pig iron and around 3,000 tonnes per annum of ferro-vanadium alloy over 37 years.

Unit operating costs of $225/t for pig iron and $4,652/t of ferro-vanadium, or $159 per tonne of pig iron after the ferro-vanadium credit, has been estimated

With current pig iron prices of $420-500 per tonne (/t), the company has used $450/t in their assumptions, while at current ferro-vanadium prices of $25,000/t, a by-product credit of $65/t of pig iron can be achieved. By-product titanium slag is deemed to be worthless, as it is too low grade to meet specification, but is successfully removed from the pig iron, thus no penalties are predicted.

Sustaining capital of 2.5% of the $450m up front mechanical plant and equipment cost was assumed for the first five years, rising to 5% over the rest of the project life.

A pre-tax Internal Rate of Return (IRR) of 22% and a pre-tax Net Present Value (NPV) of $1,261m was estimated, assuming a 10% discount rate, while the project has a 4-5 year payback.

The company has chosen not to report post-tax numbers, as they are in negotiations with the Government over any incentives that might be available. As they point out, both BHP Billiton’s (BLT) Mozal aluminium smelter and Kenmare’s (KMR) Moma mineral sands mine are declared as Industrial Free Zones and are hence exempt from corporation tax, import and export duties and Value Added Tax. Both companies pay a 1% turnover tax instead.

PFS on a 2 Mtpa pig iron production scenario

A 2 Mtpa pig iron production scenario costing $1,981m up front, $1,761m for the pig iron plant and $220m for the ferrovanadium plant, has now been modelled. Using the same $450/t pig iron and $25,000/t ferrovanadium price assumption and a 22 year project life, a pre-tax IRR of 26% and a $2,401m pre-tax NPV, assuming the same 10% discount rate is estimated.

Owing to the modular construction nature of the plant, there are few economies of scale, with the pig iron production cost estimate only falling to $224/t. With an unchanged ferrovanadium production cost estimate, the cost of producing a tonne of pig iron, assuming credit from ferrovanadium sales, only falls to $158/t.

Gearing to ferrovanadium prices

In order to directly compare Baobab’s numbers with those recently produced by Ironveld (IRON), Baobab recalculate their estimates using a ferrovanadium price of $35,000/t.

19th June 2013


Here using the same $450/t pig iron price assumption, Baobab’s 1 Mtpa scenario uplifts the pre-tax IRR and pre-tax NPV to 26% and $2.4bn respectively, while for Baobab’s 2 Mtpa scenario, a further uplift in pre-tax IRR and NPV to 29% and $2.9bn is recorded. Ironveld have yet to model a 2 Mtpa scenario.

JORC compliant resource

Baobab’s total compliant indicated resource currently amounts to 152.34 million tonnes (Mt) grading 37.4% iron and 0.4% vanadium pentoxide (V₂O₅), 13.8% titanium dioxide, 15.3% silica, 9.5% alumina, 0.006% phosphorus and 0.2% sulphur. In addition, an inferred resource of 572.29 Mt @ 33.1% iron and 0.3% V₂O₅ has been estimated.

Within the 2.5 square kilometres square Tenge/Ruoni area, a number of separate resource have been outlined using a 15% lower iron cut-off.

At Ruoni North, an indicated resource of 79.76 Mt @ 37.07% iron and 0.42% V₂O₅ and at Tenge, an indicated resource of 72.58 Mt@ 37.68% iron and 0.41% V₂O₅, has been outlined. In addition, inferred resource have been estimated at Ruoni North (28.82 Mt @ 37.99% iron and 0.42% V₂O₅), at Tenge (120 Mt @ 37.57% iron and 0.41% V₂O₅) at Ruoni South (76.82 Mt @ 33.66% iron and 0.37% V₂O₅) and Ruoni Flats (172.45 Mt @ 35.63% iron and 0.40% V₂O₅).

Metallurgical testing

For Baobab’s Tete project, magnetic separation has been successfully demonstrated to liberate a vanado-titano-magnetite concentrate with low silica, alumina, phosphorus and sulphur levels.

The pyro-metallurgical test work completed during the PFS, not only provided evidence that a high-quality, low-impurity pig iron could be generated through the direct reduction and smelting of concentrates derived from the project's iron ore, but also demonstrated the viability of using the locally produced middling by-product coal as an agent in the reduction process.

The mineralisation at Tete includes significant amounts of vanadium which will be extracted as a vanadium slag during the smelting process. Further refining of the vanadium slag results in the production of ferro-vanadium alloy,

Titanium is successfully separated from the iron during the smelting process and recovered as a titanium slag by-product grading approximately 30% TiO2. At the moment, this slag is likely to be of commercial use only as a low cost material for road construction or as an extender in the cement industry and is not forecast to contribute to the project economics.

The base case scenario is based on a three stage crushing circuit to produce 1.96 Mtpa of concentrate in a dry magnetic separation process (also known as 'coarse cobbling') at the coarse grain size of 6.3 millimetres (mm).

The iron making technology utilises multi-hearth furnaces and rotary kilns for the direct reduction of the concentrate prior to smelting in an electric furnace. Titanium and other impurities are slagged off during the smelting

19th June 2013


process. The molten metal then enters a vanadium recovery vessel, before the hot metal is directed to the casting unit to mould pig iron billets. This technology is apparently proven for the processing of ores of similar specification to the project's iron ore and is in operation in many plants worldwide, including NZ Steel's Glenbrook facility in New Zealand and EVRAZ's Highveld Steel plant in South Africa.

During the course of the PFS, bench-scale reduction and smelting pyro-metallurgical test work was carried out at the Commonwealth Scientific and Industrial Research Organisation (CSIRO) laboratories in Australia. The test work was conducted using coarse concentrates derived from the Tenge resource block and samples of thermal coal collected from two commercial operations in the immediate Tete area. The coal samples represent a middling by-product that is produced during the coal washing process and as it not currently commercially viable for export, it is being stockpiled.

The reduction test work, using a rotary kiln simulator, returned very promising results with in excess of 70% metallisation being achieved after a short residence time. Samples from the rotary kiln experiments were inductively smelted in a crucible to produce a clean disc of pig iron reporting 97% iron (Fe) with 1.8% carbon and containing a very low level of titanium of 0.002%.

Coal

Immediately south of, and sharing the Company's licence boundaries, are about 15 billion tonnes of coking and thermal coal resources being brought into production by two of the world's largest mining companies, Rio Tinto

(RIO) and Vale (VALE5-BZ), along with tier one steel producers, Tata Steel, Nippon Steel, Jindal Steel and POSCO. Other operators in the area include Beacon Hill Resources (BHR), Ncondezi Coal (NCCL) and Eurasian Natural

Resources Corporation (ENRC).

In order to deliver metallurgical coal, most of these developments generate lower quality coal, only a portion of which is economic to transport as thermal coal. Some waste coal is even backfilled, hence Baobab’s assumption of substantial by-product coal availability for its plant looks justified.

Electricity

Low tariff hydro-electric power is readily available from the 2,075 megawatt (MW) Cahora Bassa dam.

Studies are underway to expand the dam's capacity by an additional 1,300MW. A new 1,500MW scheme at Mphanda N'kuwa, also on the Zambezi River, is in the advanced planning stages.

Coal fired power plants have been proposed for Vale's Moatize and Rio Tinto's Benga coal operations, as well as the Ncondezi and Jindal projects.

Significant operating cost savings can be achieved through the co-generation of power by recovering the heat energy from the kiln operation and the electric arc furnaces, as well as the combustion energy from waste gas which is incinerated in an afterburner. This could see co-generation account for 60-80% of power requirements of the iron making process.

19th June 2013


Rail

The rail networks linking the Tete region with the ports of Beira and Nacala are in the process of refurbishment and expansion.

The Sena rail corridor, linking Tete with Beira is currently operating at a capacity of 2.5 Mtpa that will expand this year to 6 Mtpa and beyond to 18 Mtpa by 2016.

Vale is leading a consortium to refurbish and expand the corridor linking Tete with Nacala. The railway is due to be commissioned by early 2015 and will have an initial capacity of 30 Mtpa, of which 12 Mtpa will be made available to third parties.

Port

The port of Beira is currently being refurbished to accommodate coal production from Tete province. Significant multilateral investment is going into upgrading of Beira and the deep-water port of Nacala. The government, in association with the private sector, has launched three task forces to move the development of coal export options forward. It is understood that these three task forces have been mandated to review the expansion options at Beira and Nacala and an additional greenfields deep-water port in Zambezia Province at different time horizons. The development timetable coincides with the timeline of Baobab’s project, with first production modelled for 2016. It has been suggested that Beira port is better suited to higher density pig iron exports than bulk metallurgical coal, as this will reduce dredging requirements. Tax

The Government of Mozambique offers various investment incentives for major industrial projects, with more favourable taxation terms for projects that add a significant amount of value in-country, create local employment and are export orientated. For instance, BHP Billiton's (BLT) Mozal aluminium smelter and Kenmare Resources’ (KMR) Moma mineral sands project have both been granted Industrial Free Zone status which makes them exempt from corporation tax, import duties, export duties and Value Added Tax, while requiring payment of a 1% turnover tax. The completion of the PFS now enables the Company to enter into discussions with the Government of Mozambique as to the structure of the tax regime for the Tete Project. It is for these reasons that Baobab has not presented after-tax figures.

Pig Iron

Pig iron or Merchant Pig Iron (MPI) is one of four so called Ore Based Metallics (ODMs), the others being Hot Briquetted Iron (HBI), Direct Reduced Iron (DRI) and Iron Nuggets.

19th June 2013


ODMs are scrap supplements to dilute impurities in ferrous scrap used in Electric Arc Furnaces. ODMs are also productivity enhancers in Blast furnace (BF) ironmaking and Basic Oxygen Furnace (BOF) steelmaking.

Pig iron is classified as a raw material derived from the intermediate smelting of iron ore. It is used alongside scrap iron in electric arc furnaces (EAFs) to generate crude and finished steel products. The global consumption of pig iron is estimated at around 70 Mtpa (including the domestic Chinese market), complementing the approximate 350 Mt annual consumption of scrap iron.

Due to its consistent chemical composition and density, pig iron is considered a superior product and typically trades at a premium to scrap iron. Pig iron prices vary between markets, with North America typically reporting the lowest prices and Asia, in particular China, reporting the highest. Current pricing ranges from $425/t to $500/t.

The market fundamentals for pig iron appear robust and supported to a large extent by BRIC (Brazil, Russia, India and China) economies as well as sub-Saharan Africa, where regional demand for construction steel continues to grow on the back of rapid urbanisation and the commissioning of large scale infrastructure projects. This could potentially include Mozambique's emerging offshore gas industry. Other key drivers to the continued growth of the pig iron sector include the maturing of China's scrap iron market and a general decline in the quality of scrap iron elsewhere in the world.

However, developments in the HBI/DRI and nugget iron markets can have an impact on the outlook for pig iron.

Current capacity for HBI/DRI is estimated by the Commodity Research Unit (CRU) to amount to just over 17 Mtpa, with Venezuela having 6.9 Mt of HBI capacity, Malaysia 2.45 Mt of mainly HBI capacity, Russia 2.3 Mtpa of HBI capacity, Libya 1.75 Mtpa of mainly DRI capacity, Qatar and Oman having 1.5 Mtpa each of combined HRI and DRI capacity and India with 0.9 Mtpa of combined HBI and DRI capacity.

Steel Dynamics (STLD-NASDAQ) has recently opened a 0.5 Mtpa capacity Iron Nugget plant at Mesabi in the US.

Helped by depressed US natural gas prices, US steel major Nucor (NUE-NYSE) is about to open 2.5 Mtpa of DRI capacity in the US, with first production by year end, while Voest Alpine (VOE-Austria) has also announced intentions to build a similar plant in the US.

CRU estimates that assuming an iron ore pellet price of $160/t, a free on board production cost of $292/t for DRI is forecast.

Baobab’s PFS estimates a pre-credit free on board (FOB) cost of production of US$225/t pig iron and post by-product credit cost of production of US$159/t. This is considered by the company to be very competitive, particularly when compared to the estimated FOB operating cost of $385/t of Brazilian operations. This estimate assumes a domestic iron ore cost of $5.40/t. Operations in Russia and the Ukraine are thought to have similar production costs to Brazil, while domestic Chinese operating costs are thought to be substantially higher.

19th June 2013


Some commentators consider Nucor’s major Direct Reduced Iron development in the US will have an impact on pig iron demand, particularly as 10 Mtpa, or around two thirds of Brazilian pig iron is exported to the US). Nucor, the largest scrap recycler in the US, is one of the world’s largest consumers of pig iron.

At a US$100/t free on board cost of Brazilian 62% iron ore, Nucor’s DRI has equivalent pig iron costs of $324/t freight included.

There is a debate as to the most appropriate pig iron price to use for financial projections. Baobab and Ironveld (IRON) have used $450/t, which is currently above the spot price of $420/t. However, it is argued that as the current cost of pig iron production in China is around $400/t, while that in Brazil is only a fraction lower at $385/t, the obvious $400/t price to use in evaluations is not sensible for a 25 year life project, as the dominant Chinese and Brazilian producers’ costs are not going to suddenly reduce.

Hence, in spite of the impact of Nucor’s DRI pig iron substitution plan, it can be argued that $400/t is not sustainable over the longer term. For new capacity $450/t may be more sensible.

Vanadium

The mineralisation at Tete includes significant amounts of vanadium which will be extracted as a vanadium slag during the smelting process. Further refining of the vanadium slag results in the production of ferrovanadium alloy, which is currently sold at price levels of around $25,000/t. The operating cost to upgrading the vanadium slag to ferrovanadium alloy is $4,650/t, less than a third of the operating cost of a dedicated ferrovanadium production plant.

The recovery of vanadium from by-‐product slags from iron-making processes is a well-known and proven technology. The operating and capital cost of recovering vanadium via a roast-‐leach process has been estimated to an order of magnitude level of accuracy. This process lends itself to the production of V2O5 flake, V2O3 powder or ferrovanadium alloys. For the purposes of Baobab’s PFS, the production of ferrovanadium (FeV80) was considered as the final product.

Vanadium Market Outlook

Australian vanadium hopeful Atlantic Ltd (ATI-ASX) has recently commissioned a vanadium market survey from industry specialists TTP Squared, who have forecast a short and long term ferrovanadium supply shortage.

81% of vanadium supply comes from mined ores, with 19% coming from secondary sources, which include oil residues, power station fly ash and spent catalysts. 67% of this supply is in the form of vanadium slag, with 13% as vanadium metal.

37% of world production occurs in China, 35% in South Africa, 26% from Russia and 2% from elsewhere.

19th June 2013


85-90% of vanadium is used in steel alloying, 5-10% in high performance alloys and around 3% is converted into various vanadium chemicals.

TTP Squared forecast a 1.5 to 2 month supply shortfall throughout the period 2013-2017 and this helps support their price forecasts of $80,000/t this summer, falling to a more sustainable forecast of $50-60,000/t over the same 2013-17 time period, which is still higher than current spot prices of around $25,000/t.

Developments in China are important to this growth scenario, with new regulations eliminating the use of Grade 2 reinforcing bar (rebar) for the construction industry, which uses no vanadium and its substitution with Grade 3, which uses 0.35 kilogrammes of vanadium per tonne (kgV/t) of steel. TTP Squared estimate that in 2012 China consumed 86 Mt of Grade 2 rebar, 66 Mt of Grade 3 and 13.5 Mt of grade 4, which uses even more vanadium (1 kgV/t).

If all current Grade 2 rebar demand is replaced overnight by an equivalent amount of Grade 3, demand of 30,000 t of vanadium would ensue. This is a material amount when compared to the current 70,000 tpa vanadium market.

TTP squared forecast the current global intensity of use of 0.055 kgV/t of steel is set to grow to 0.07 kgV/t by 2017, as current Chinese intensity of use increases from its current 0.04 kgV/t level. In comparison, current US intensity of use amounts to 0.087 kgV/t.

Supply growth is forecast by TTP Squared to slightly lag demand growth, particularly as their forecast of 6,300 tpa of ferrovanadium from Atlantic, from end June 2013 looks optimistic. In spite of significant ore resources in South Africa, Highveld is only expected by TTP Squared to increase production over this period by a nominal amount, owing to electricity supply issues.

TTP Squared point out that vanadium use in aerospace titanium alloys is the fastest growing subsector, with vanadium consumption expected to rise to 6,000 t in 2016, from 3,000 t in 2011.

Other strong growth markets include extremely high capacity vanadium redox electricity storage batteries, which are forecast to consume 8,500 t of vanadium in 2017, up from 1,100 t in 2012. Consumption of vanadium in lithium vanadium phosphate batteries for electric vehicles is forecast to grow to 1,700 t of vanadium in 2017, from 200 t in 2012.

Baobab has given us the choice of using either $25,000/t or 35,000/t for FeV while Ironveld have used $35,000/t in their respective PFSs.

Ironveld’s projections for the FeV price looks a little optimistic in that the current European FeV price is only $28,000/t, but this is a lot lower than TTP Squared projections which sees a spot price of $80,000/t achieved this summer and $50-60,000/t over the longer term.

The various current and potential vanadium producers are analysed in Appendix 1.

19th June 2013


Titanium Slag Should a process be developed to extract, or upgrade their low grade titanium slag, further economic benefits may be available to Baobab.

Titanium Slag is an upgraded white pigment that comes from ilmenite and used in the manufacture of paint, paper and plastics. Titanium slag contains a high percentage of titanium dioxide (TIO₂), which is used largely to produce TiO2 pigment. Titanium slag is produced by smelting where it is tapped from furnaces and treated to produce various grades of so called chloride slag.

A number of titanium slag producers also sell pig iron as a by-product, so it is worthwhile briefly reviewing them in Appendix 1 by way of background.

The world titanium slag market is around 2.3million units of titanium dioxide (TiO₂) per annum.

Rio Tinto (RIO) is the dominant titanium slag producer with capacity to produce around 1.75 million TiO₂ units per annum; Tronox (TROX-NYSE) is second with capacity of 0.35 Mtpa, while TiZir owned jointly by MDL (MDL-

ASX) and Eramet (EMA-Euronext) is third with capacity of 0.25 Mtpa. The combined capacity of the Chinese producers amounts to 0.3 Mtpa. Mining

Baobab’s PFS has focused exclusively on the resources underlying the 2.5 square kilometre (km²) footprint of the Tenge/Ruoni prospect. Mineralisation at Tenge/Ruoni has been synformally folded with the fold hinge plunging gently to the west-northwest. The northern and southern limbs of the fold comprise the Ruoni North and Ruoni South resource blocks, while the outcropping fold hinge comprises the Tenge resource block to the east. The buried central portion of the fold comprises the Ruoni Flats resource block. Drilling programmes conducted during 2011 and 2012 estimated a total resource of 550 Mt, across the four resource blocks at Tenge/Ruoni Baobab’s consultant modelled mining requirements to support 1Mtpa pig iron production in a staged, two pit configuration exploiting portions of the Tenge and Ruoni North resource blocks for a total of 110Mt over a mine life of 37 years. The Tenge Stage 1 pit would be mined in years zero to 23 with a very low average strip ratio of 0.4. Mining in the Ruoni North Stage 1 and 2 pits would begin in years 18 and 25 respectively to the end of the modelled period. Mining would utilise a conventional open pit method with drill and blast followed by load and haul. Aerial conveying options were also considered to transport iron ore across the Revuboè River to the proposed plant location. Pit optimisations, using Whittle Four-X software, were undertaken in the Tenge, Ruoni North and Ruoni South resource zones to generate pit shells

19th June 2013


from which mine production schedules were developed for use in the cash flow model. Other Baobab Resources projects in Mozambique

Muande

The Company announced on 15 November 2010 the signing of a Joint Venture with North River Resources (NRRP) in relation to North River's Muande project in the Tete province of Mozambique. The Muande project comprises two exploration licences covering an area of 338 km² located approximately 25 km northwest of the provincial capital of Tete and contiguous with Baobab's Tete project. The international highway to Zambia passes within 3 km of the project.

The Joint Venture is structured such that Baobab may earn an increasing participatory interest in the project of up to 90% through funding three prescribed stages. Stage 1 is all but complete; earning Baobab a 60% holding in the Project and the Company has entered discussions with North River as to their interest in participating pro-rata for Stage 2.

The deposit is hosted in a carbonatite and was explored during the 1980s by the Geological Institute of Belgrade (GIB), who completed two phases of vertical diamond drilling between 1983 and 1985 totalling 5,570m, 2,960m of which falls within the Joint Venture area. The Institute also completed more than 10km of trenching and bench-scale metallurgical test work.

Using the GIB data sets in conjunction with more recent soil geochemistry and aeromagnetic surveys, Baobab consultants calculated a compliant Exploration Target of 200 Mt to 250 Mt to an average depth of c.40m below surface. They also carried out a high level review of the GIB metallurgical data which indicated that a magnetite concentrate containing 67% Fe could be generated, via a process of coarse grinding and magnetic separation, followed by regrinding and a flotation circuit to recover a phosphate rock concentrate containing 36% phosphorus pentoxide (P₂O₅). Total magnetite and apatite (a phosphate mineral) recoveries of 92% and 70% respectively were recorded.

During the latter half of 2011, Baobab completed an approximate 2,000m diamond drilling program at Monte Muande. This comprised 10 angled drill holes sited along a staggered traverse transecting the central portion of the deposit and drilling intersected broad zones of shallowly dipping magnetite and apatite mineralisation.

Due to the disseminated nature of the apatite mineralisation, the entire length of each drill hole was sampled and analysed. The average head grade of all sampled material reported 10% Fe and 3% P₂O₅. The average head grade of all Muande significant intercepts was 21% Fe, with the Davis Tube Recovery (DTR) magnetic concentrate grades reporting a weighted average of 69% Fe, at a mass recovery of 26% (representing a total iron yield of 87%). Deleterious elements are generally very low in the DTR concentrate, with the exception of sulphur (S) and titanium (TiO2); additional test work is currently

19th June 2013


underway to determine the best magnetic strength conditions to optimise the concentrate quality.

The magnetite intercepts generally reported an enrichment of phosphate compared to background values with an average head grade of 4% P₂O₅. The phosphate was further upgraded to a calculated weighted average of 5.5% (ranging up to 8.8%) in the non-magnetic reject component of the DTR process. A bench-scale apatite recovery test work programme is being prepared to determine the potential quality and recovery rates of a phosphate rock concentrate.

A total of 76 vertical trench samples have been collected from various locations across the Monte Muande deposit. The sampling programme was designed as a first-pass test of the eluvial horizon (in situ remnant soil and weathered bedrock) overlying the deposit which may represent a potential source direct shipping ore (DSO), requiring little or no beneficiation. Following a preliminary phase sizing and analysis, a more comprehensive auger programme covering the surface extent of the eluvials in the Monte Muande area was completed during the second half of 2012. Screening and analysis of the auger samples is complete and analysis is underway.

Mundonguara

During 2008 the Company announced a JORC compliant inferred resource estimate on the 1km long mine portion of the Mundonguara Project of 3.1 Mt grading 1.4% copper, 0.11 grammes per tonne (g/t) gold and 2.1g/t silver. This resource estimate, in conjunction with a soil geochemical survey, geophysical interpretation, trenching and RC drilling results indicate that the Mundonguara system is significantly larger than previously recognised, with mineralisation remaining open at depth and along strike.

A large footprint nickel in soil anomaly, supported by Induced Polarity (IP) geophysics, has been defined over a strike length of about 3 km immediately south of the mine. Nickel analysis in drill, channel and trench sampling has recorded significant intercepts of up to 0.72% Ni.

Baobab commenced diamond drilling during July 2011. The programme concluded during September 2011 with 10 drill holes completed for an aggregate total of 1,800m. The drilling targeted the nickel in soil anomalies and associated IP chargeability responses. Analysis of the drill samples returned results of limited interest and the Company is seeking a Joint Venture partner to further develop the asset.

Changara

The Changara project comprises four exploration licences covering an area of 525 km² located approximately 100 km southwest of Tete and flanking Zimbabwe's north-eastern border. The national power grid passes within 15 km of the project's eastern boundary.

Although the area has experienced limited historical exploration, it is considered highly prospective for so called SedEx/Broken Hill Type polymetallic base and precious metal and manganese mineralisation and

19th June 2013


hosts numerous occurrences of zinc, lead, manganese, iron ore, fluorspar, copper and silver.

On 28 November 2012, the Company announced that it had entered into a joint venture with Metals of Africa, (MTA-ASX) that holds eight exploration licences, known collectively as the Rio Mazoe project, which are contiguous with Baobab's Changara Project. Metals of Africa has a strong technical management team resident in Mozambique and has commenced a 4,500m drilling programme, assessing two high priority lead/zinc/silver targets within the Rio Mazoe Project.

At a share price of 16 Australian cents per share, Metals of Africa is capitalised at just over A$5m, while at end March 2013 they had $1.4m of cash.

Capitalisation and cash position

Baobab has currently 298.4m shares outstanding. This can be further diluted by 24.1m addition warrants, employee, director and third party options. At 17 pence per share, Baobab is capitalised at £50.7m. At end December 2012 it had £1.099m of cash remaining. This has been supplemented, so far this year, with a £1.023m drawdown on its £17m Equity Line facility provided on 25th October 2010 by Dutchess Opportunity Cayman Fund Ltd and £3m from the exercise of warrants by African Mining & Development SICAR. We assume they have around £2.7m of cash remaining, giving them an enterprise value of £48m. Finance

Baobab has retained Standard Chartered Bank as its strategic corporate advisor. Standard Chartered, through its specialist mining corporate finance division, will assist Baobab to determine and execute its corporate opportunities with relation to the Tete Project. As part of the mandate, Standard Chartered will assess a range of strategic corporate opportunities and financing alternatives to support the successful development of the Tete project.

Shareholdings

As of 10th May 2013, African Minerals Exploration & Development SICAR is the largest shareholder with a 26.89% holding. The Directors collectively hold 3.86%, while a former director also holds 3.00%. The rest of the shares are mainly held by private clients, via adviser nominees. Following recent share issues, the IFC appears to have been diluted below 3%.

Board of Directors Chairman Jeremy Dowler has served on the boards of various resource companies and was a founding shareholder and the former Finance Director of Platmin Limited, a platinum exploration and development company with projects in South Africa.

19th June 2013


Managing Director Ben James is a geologist with over 15 years’ experience in the exploration and mining industry. He has previously worked for Oceana Gold, RSG Global, Katanga Resources, Hill 50 Gold and Herald Resources. Non-Executive Director Jonathan Beardsworth is a principal at Cutfield Freeman & Co a corporate finance and mergers & acquisition boutique focused exclusively on the mining industry. He was previously Chief Executive Officer of Metals Exploration (MTL), where he took the Runruno gold/molybdenum project in the Philippines, from exploration through to Bankable Feasibility Study. Non-Executive Director Dr Mohan Kaul is Chairman of the Commonwealth Business Council and Commonwealth Investment Corporation and is a member of the Presidential Advisory Councils of Mozambique, Uganda and Zambia. Non-Executive Director David Twist has more than 30 years’ experience in mineral research and exploration. He is a founding director of Platmin, Taung Gold, Sephaku Holdings and co-founded African Minerals Exploration & Development SICAR. Non-Executive Director Carlo Baravalle is a former corporate financier and co-founded African Minerals Exploration & Development SICAR. Management Joint Company Secretary and Chief Financial Officer Services Graham Anderson has over 25 years of commercial and corporate experience. Project Manager: Feasibility Studies Christian Kunze has 20 years’ experience in iron ore project development, plant engineering and steel manufacture Exploration Manager Iain Plews has 30 years’ experience in exploration and mining in Africa and has worked with Anglo American, Ashanti Goldfields, ITMN Corporation, Reunion Mining and Takoradi Gold NL. Conclusion

Baobab has modelled a 2 million tonne per annum (Mtpa) pig iron project costing US$1,981m up front. Assuming a pig iron price of $450 per tonne (/t) and $35,000/t for ferro-vanadium, in a compliant PFS, they estimate a pre-tax Internal Rate of Return of 29% and a pre-tax Net Present Value of $2.9bn (their share £1.62bn), assuming a 10% discount rate.

The outlook for pig iron is tempered by the current poor outlook for iron ore and steel. The growth of EAF production is forecast to drive growth, but the market may have to absorb growth in US Direct Reduced Iron production, which will lead to a fall in pig iron demand.

19th June 2013


The outlook for ferrovanadium is curious, with a currently depressed spot market. This is in spite of strong growth forecasts, as increased Chinese specifications for re-enforcing bar drive demand. A current spot price of $25,000/t doesn’t square with short term and long term forecasts of $80,000/t and $50-60,000/t respectively.

Baobab’s project has considerable strategic importance for Mozambique, with considerable developing steel demand for the various natural gas developments contemplated. Furthermore, the project is surrounded by waste coal owned by major existing global steel makers, with surplus electricity and water, while current rail infrastructure is more favourable to the transportation of value added pig iron, than bulk metallurgical coal.

Multilateral and global steel producer funding is likely to be forthcoming for Baobab’s project. In the meantime Baobab trades at just under 6% of project after-tax Net Present Value and that assumes a 50% tax rate, which is two third more than the statutory Mozambiquan level.

19th June 2013


Appendix 1 Comparison to other projects and companies

At present there is one direct comparator to Baobab namely Ironveld PLC

(IRON) who are evaluating a project in South Africa, while Bushveld Minerals

(BMN) is about to reveal a PFS on a similar project, also in South Africa. The processing of vanado-titano-magnetites has occupied a number of companies both large and small. The production of a combined vanado-titano-magnetite concentrate is generally not an economic proposition, as there are a limited numbers of buyers for onward processing, and they take much of the benefit of the contained vanadium and titanium. As a consequence, a number of novel metallurgical processes have had to be evaluated and the market is quite fragmented and depends on the metallurgy of each individual project. In general titanium acts as a contaminant to iron and vanadium and vice versa. Vanado-titano-magnetites may be vanadium, or they may be titano rich. Vanadium rich deposits usually lend towards the production of vanadium products and a similar logical conclusion can be reached for titanium rich deposits. In general, those vanado-titano-magnetites that depend upon sophisticated metallurgical processes, in order to achieve full separation of vanadium from titanium and vice versa, are not currently economic owing to high capital cost requirements. As currently configured both Baobab and Ironveld have projects that rely on ferro-vanadium by products and hence competitive vanadium deposits may have a long term impact on the price. Should a process be developed to extract or upgrade their low grade titanium slag, further economic benefits may be available. Ironveld (IRON)

Their recent Pre-Feasibility Study into their proposed 71% owned HACRA Bushveld pig iron and ferro-vanadium (FeV) smelter in South Africa is encouraging, with a post-tax Internal Rate of Return of 28.8% and a post-tax Net Present Value of US$1,069m (their share £500m), assuming a 10% discount rate.

This assumes production of 1 million tonnes per annum of pig iron and 9,670 tonnes of FeV from 2019 for 25 years, at a capital cost of $938m, a pig iron price of $450 per tonne and a FeV price of $35,000/t.

There is a 12 megawatt (MW) starter option that would cost $60m and produce 46,000 tonnes per annum of pig iron and 475 t of FeV from 2015. For the full plant, four 75 MW smelters would be required. Water is apparently available for the starter plant and can be made available for the full scale version, while surplus ESKOM electricity is apparently available for the starter operation, with 20 MW of power for the full scale smelter coming

19th June 2013


from ESKOM’s new Medupi coal fired electricity plant that is expected to come on stream in Q1 2015.

The PFS utilises their most recent JORC compliant indicated resource which amounted to 22.39 Mt grading 49.5% iron, 15.0% TiO₂ and 1.14% V₂O₅. In addition, an inferred resource of 35.32 Mt grading 45.0% iron, 13.8% TiO₂ and 1.06% V₂O₅ has been estimated. Deleterious components appear to be low and manageable, with 5.01% silica, 0.01% phosphorus pentoxide and 0.08% sulphur reported in the indicated resource.

The above resource is estimated using a 20% iron cut off and is only evaluated down to a depth of less than 120m. There is a potential issue in that the resource occurs in three layers with differing amounts of silica; however, extraction shouldn’t be a problem in an open pit scenario.

There is a debate as to the most appropriate pig iron price to use for financial projections. Ironveld has used $450/t, which is currently above the spot price of $420/t. However, it is argued that as the current cost of pig iron production in China is around $400/t, while that in Brazil is only a fraction lower, the obvious $400/t price to use in evaluations is not sensible for a 25 year life project, as the dominant Chinese and Brazilian producers’ costs are not going to suddenly reduce. Hence it can be argued that $400/t is not sustainable over the longer term, with $450/t being more sensible. Ironveld’s operating costs are just below $300/t for pig iron and $4,700/t for FeV.

Ironveld’s projections for the FeV price looks a little optimistic in that the current European FeV spot price is only $28,000/t, but there is upside in their numbers as they believe they could produce flake vanadium from FeV in a separate process.

While this is encouraging, they are dependent on South African power and apparent water availability, both commodities that one would want to see greater certainty of availability than at present, before one can get excited. In addition one would wish to see a breakdown of their $938m capital cost for a 1 Mtpa project, as it is $205m or 17.9% lower than Baobab’s for a similar sized project. Hopefully, on further information one can anticipate some closing of this gap, but an increase in Ironveld capital costs will obviously negatively impact the economics of their project.

At around 8 pence per share, Ironveld is capitalised at about £18m, with £1.9m of cash at end December 2012. Their enterprise value of around £16.5m is only 3.3% of project after-tax NPV. This is around a 55% discount to the valuation given by the market to Baobab’s project, but information on Ironveld’s project is less forthcoming, whilst the supply of cheap coal and the availability of water and power are less certain.

Bushveld Minerals (BMN)

Bushveld Minerals are developing a vanado-titano-magnetite project of the same name in South Africa. They currently own 64-68.5% of the various licences. Initially, they have modelled the production of a vanado-titano-magnetite concentrate, but they have aspirations to produce pig iron and ferro-

19th June 2013


vanadium, in presumably a similar process to that being evaluated by Ironveld. There is some confusion regarding their resource, it is not immediately apparent if it is code compliant, they switch between iron and magnetite grades and cut-offs and it encompasses a number of different layers or zones, which questions to what depth this could be effectively mined.

A new end December 2012 compliant indicated resource on the P-Q Zone of 350 million tonnes (Mt) grading 31.16% iron (or 44.58% magnetite), 9.8% titanium dioxide (TiO₂) and 0.18% vanadium pentoxide (V₂O₅) is OK and uses a 35% magnetite cut off. While silica of 27.2% is probably OK and 0.07% phosphorus pentoxide is definitely OK, one may query their high alumina levels which come in at 10.7%.

The above resource is for material above 200 metres (m) below surface, an additional inferred resource of 324.62 Mt @ 30.37% iron, 9.2% TiO₂ and 0.16% V₂O₅ is carried for material between 200m and 400m below surface.

At the MML Zone, at depths of less than 100m, an additional inferred resource of 66.21 Mt @ 37.1% iron, 9.2% TiO₂ and more significantly 1.24% V₂O₅ has been estimated. Rather than 35% magnetite, here a 40% magnetite cut-off is used for this resource.

The scoping study on the project to produce a vanado-titano-magnetite concentrate was encouraging, but makes a huge assumption as to price.

They expect to produce a high titanium magnetite concentrate for sale to China, grading 55% iron, 19.5% titanium dioxide and 0.33% vanadium pentoxide and assume they receive US$177 per tonne, Carriage, Insurance and Freight.

As the market for titanium magnetite concentrates is very thin and stacked in the favour of the buyer, it is unclear that these prices are achievable. They state an advantage of high titanium levels, but comparisons with the prices being achieved by others would be useful.

If we assume this price, for a 5 million tonnes per annum (Mtpa), 18 year operation, producing 2.2 Mtpa of concentrates, costing US$125.8m up front and $2.5m per annum of sustaining capital, a pre-tax, but post-royalty Internal Rate of Return (IRR) of 34.2% and a pre-tax, but post-royalty Net Present Value (NPV) of $140m, assuming a 12.5% discount rate, was estimated. Operating costs of $51 per tonne (/t), fall to $6/t, assuming titanium and vanadium credits.

As this scenario utilises only 12% of their compliant resource, a 7 Mtpa, 12 year scaled up option costing $153m, slightly improves the IRR to 39% and the NPV to $179m, using the same assumptions as above.

They need more work to justify their $177/t titanium magnetite concentrate price assumption, with that they could even justify using a lower 10% discount rate.

19th June 2013


Nucor (NUE-NYSE)

Nucor the US largest scrap recycler is one of the world’s largest consumers of pig iron.

This will fall away as 6-7 Mt of scrap is substituted by new Direct Reduction Iron (DRI) iron developments. Their Trinidad DRI plant already works at a 2 Mtpa capacity, whilst their new Louisiana DRI plant is set to come on stream by the end of this year.

With a US$100/t free on board cost of Brazilian 62% iron ore, Nucor would have equivalent pig iron costs of $324/t freight included.

EVRAZ (EVR)

EVRAZ is a major global producer of pig iron (from Russia and the Ukraine), steel (Russia, the Ukraine, South Africa and the US) and vanadium products (from Russia, the US and South Africa). In March 2013, they announced that they had signed a preliminary agreement to sell their 85% owned listed South African affiliate EVRAZ Highveld Steel and Vanadium. EVRAZ NTMK in Russia is the world's biggest processor of vanadium-enriched titano-ferrous ores with succeeding vanadium recovery in blast oxygen furnaces and in oxygen converters using special technologies. EVRAZ Vanady Tula is the largest European producer of vanadium pentoxide, ferrovanadium-50 and ferrovanadium-80, both alloy additions used to manufacture extra high strength steel for various applications. They process the vanadium slag produced by NTMK and also produce titanium alloys

EVRAZ Stratcor’s unique facilities at its Hot Springs, Arkansas, USA, plant produce up to 12 million pounds per year of the highest-purity vanadium oxide in the world. Some of this oxide is then converted into vanadium-aluminum that meets the critical-quality requirements of titanium alloys used in jet aircraft and other aerospace applications. Hot Springs also converts this vanadium oxide into many specialty products that play a vital role in the production of chemicals, petrochemicals, gases, and storage batteries. Hot Springs oxide is also the vanadium source for ferrovanadium that strengthens steel.

EVRAZ Nikom converts the vanadium oxide produced by Vanady Tula into ferrovanadium, the major vanadium product used by the steel industry to increase strength and hardness. EVRAZ Nikom can produce 4,600 metric tons of ferrovanadium per year that are shipped to steelmakers globally.

EVRAZ’s huge KGOK mine not only supplies iron ore for its steel operations, but is also a source of vanadium for ferrovanadium. When this ore is used to produce steel at EVRAZ’s NTMK steel plant, the vanadium ends up in the

19th June 2013


steel slag. This slag, which contains approximately 20% vanadium oxide, is then shipped to Vanady-Tula where the vanadium is recovered. Vanadium recovered from iron ore is claimed by EVRAZ to be the lowest-cost feed for downstream vanadium products.

In 2012, EVRAZ KGOK produced about 9.6 Mt of products: 6 Mt of pellets and 3.6 Mt of sinter.

EVRAZ Highveld Steel and Vanadium Limited is a vertically integrated steel and vanadium slag producer. At the end of March 2013 EVRAZ announced the sale of its 85% stake in EVRAZ Highveld to a Black Economic Empowerment consortium for US$320m in cash. This deal has yet to close.

Highveld mines titaniferous magnetite ore at their Mapochs mine at Roossenekal, Limpopo province, South African and produce iron and steel products and vanadium-bearing slag at their Malahleni, Mpumalanga steelworks.

The major products of the vanadium segment are vanadium slag and ferrovanadium. Vanadium slag is a by-product from the steelmaking process, and this slag is transferred from the steelworks to the vanadium plant, which then forms the input into the business of the vanadium business.

Evraz Highveld is a useful source of actual pricing; in the three months to end March 2013, they reported an average ferro vanadium price of $29,000/t and a realised price of $10,000/t for vanadium slag. EVRAZ reported for the combined group, for the same three month period, an average ferrovanadium price of $28,814/t, $30,690/t for their special alloy Nitrovan® and $33,366/t for oxides, vanadium aluminium and chemicals.

Evraz itself reported realised pig iron prices of $291/t and $389/t ex-works Russia and Ukraine respectively in Q1 2013. This compared to $266/t and $313/t respectively in Q4 2012 and $450/t and $478/t respectively in Q1 2012.

AMG Advanced Metallurgical Group (AMG-Euronext)

AMG is the largest producer of ferrovanadium in North America and the largest recycler of waste streams used to produce vanadium in the world. AMG’s advanced technological process recovers these valuable specialty metals from hazardous waste, eliminating the need to landfill this waste. AMG estimates that the energy consumption used to produce recycled vanadium is approximately 60% of primary manufacturing routes.

Ferrovanadium is a key component in the production of carbon steel used for infrastructure. When added to crude steel, ferrovanadium creates a product that is lightweight and extremely high in tensile strength and wear resistance. AMG’s ferrovanadium is marketed under the FEROVAN® brand name.

19th June 2013


AMG also produces a wide variety of vanadium chemicals and has a fully integrated production process, extracting vanadium from secondary raw materials sources such as combustion and gas-reducing residues. AMG’s products include:

Vanadium Pentoxide - (V2O5) is the highest-purity vanadium material in the world. It is used in catalysts and in many other high-purity applications. This material absorbs light and solar radiation, and blocks infrared heat. It is primarily used in the life science, energy and glass industries.

Vanadium Sulphate - is used in the production of large current-capacity batteries.

Lithium Vanadate – is used in rechargeable batteries in mobile devices (mobile phones, laptops etc.) and for vehicle power engines. Lithium vanadate improves energy storage and life cycles.

Ammonium Metavanadate – used as a base substance for yttrium vanadate, which is used in the energy industry as luminescent material for light bulbs.

Eramet (ERM-Euronext) In addition to its 50% ownership of TiZir (page 26), the French metallurgical group also owns Gulf Chemical & Metallurgical Corp (GCMC). GCMC is the world’s largest recycler of spent petroleum catalysts and a leading producer of ferroalloys. They are the only processor that uses both a hydrometallurgical operation to produce the pure oxides of molybdenum and vanadium, as well as a pyrometallurgical operation which produces high-quality metallic alloys and alumina products. These unique patented operations allow GCMC the flexibility to optimize the metal values contained in spent catalysts. The process recovers molybdenum, vanadium, nickel, cobalt and various alumina products that are then reused in chemical and metallurgical applications by major catalyst producers and steel manufacturers.

Glencore Xstrata (GLEN)

Xstrata’s Rhovan operation is situated approximately 30 kilometres to the north-west of Brits in the North-West Province of South Africa. The mineral deposit comprises a vanadiferous, titaniferous magnetite gabbro with the vanadium occurring in the magnetite. The mining is performed by opencast mining methods and Rhovan’s main product is ferrovanadium, with production capacity of 10,000 tpa of vanadium pentoxide and 2,700 tpa of ferrovanadium. Isoalloys SA Isoalloys is a small private Brazilian producer of ferrovanadium, ferro molybdenum and ferro manganese.

19th June 2013


Moxba-Metrex Moxba-Metrex is a private Dutch company, specializing in the responsible and environmentally friendly processing of spent catalyst and metal-containing residues since 1974. They have created a complete recycling chain in Holland, turning spent catalyst and metal-containing residues back into first class products and base materials. They produce vanadium pentoxide flakes and ammonium metavanadate.

Pangang & Chengde According to TTP Squared, Pangang and Chengde are the preferred Chinese producers of vanadium. Pangang already has a 50% market share, with Chengde around half their size. Presumably their preferred status means that these proportions will grow over time as they absorb smaller Chinese producers. Atlantic (ATI-ASX)

Atlantic acquired 100% of the Windimurra vanadium project in Western Australia in 2010. After achieving first production in January 2012, Atlantic continues to struggle to achieve production of 6,300 tonnes per annum of contained vanadium.

Largo Resources (LGO-TSX-V) Largo is constructing its lead US$230m (up front) Maracas vanadium project in Brazil, which in April 2013 they indicated that it was on track for commissioning in Q3 2013. From a vanado-titano-magnetite grading 1.1% V₂O₅ they look to produce 6,376 tonnes of V₂O₅ from end 2013 and 4,899 t of vanadium in ferrovanadium from 2015 following the construction of a suitable plant, costing $50m extra. Assuming a price of $14,040/t for V₂O₅ and $28,010/t for ferrovanadium for 29 years, an after-tax Internal Rate of Return of 26.3% and an after-tax Net Present Value of $554m, assuming an 8% discount rate, has recently been confirmed. In addition, Largo holds another vanado-titano-magnetite project at Campo Alegre de Lourdes, also in Brazil, where a non-compliant resource of 133 Mt @ 50% iron, 21% TiO₂ and 0.7% V₂O₅, has yet to be fully evaluated.

19th June 2013


King River Copper (KRC-ASX) King River Copper is the renamed Speewah Resources, who were looking to develop a vanado-titano-magnetite resource at Speewah Dome in Western Australia. From a total measured, indicated and inferred resource of grading around 0.30 V₂O₅, 14.7% iron and 2% titanium, a concentrate grading 54.2% iron and 2.48% V₂O₅ is subject to mixed chloride leaching and solvent extraction to produce 75,000 tpa of high purity TiO₂, 12,400 tpa of V₂O₅, 410,000 tpa of hematite and 200,000 tpa of ammonium sulphate. Assuming a price of $3,750/t for high purity TiO₂, $13,500 for V₂O₅, $160/t for hematite and $275/t for ammonium sulphate and an up-front capital cost of $896m, an April 2012 scoping study indicated a pre-tax IRR of 23.4% and a pre-tax NPV of 1.4bn. The discount rate for the NPV estimation was not given. Owing to lack of finance for its hydrometallurgical plans, King River is now evaluating nearby copper prospects. TNG (TNG-ASX)

In spite of a lack of finance, TNG continues to try to develop its Mount Peake vanado-titano-magnetite project in the Northern Territories of Australia. Here, using a hydro-metallurgical process to produce 245,000 t of V₂O₅, 20.24 Mt of iron and 6.40 Mt of TiO₂ over 17.2 years, a 2012 PFS estimated a pre-tax IRR of 31.8% for a project costing A$563m up front. While this base number is encouraging, unfortunately, fancy pricing estimates of $20,305/t for V₂O₅, $400/t for TiO₂ and $200/t for iron ore was used in order to obtain it. The company argues that the recent weakness of the Australian dollar has bolstered project economics. Syrah Resources (SYR-ASX)

In addition to the world sleeping easy safe in the knowledge that they have over 1 billion tonnes of graphite resource at their Balama graphite and vanadium project in Mozambique, the vanadium resource cannot be ignored either.

The world’s graphite “shortage” may have been solved, but has the vanadium one be solved as well?

At Balama East, a maiden Joint Ore Reserves Committee compliant inferred resource of 579 million tonnes (Mt) grading 10.6% total graphitic carbon (TGC) and 0.26% vanadium pentoxide (V₂O₅), was estimated using a 5% TGC cut-off, for 61.7 million tonnes of graphite and 1.494 Mt of V₂O₅.

19th June 2013


This brings the whole Balama resource (West and East) up to 1.15 billion tonnes grading 10.2% TGC and 0.23% V₂O₅, for 117 Mt of graphite and 2.7 Mt of V₂O₅, using the same cut-off.

From 0-100 metres depth, the resource amounts to 446.8 Mt @ 10.4% TGC and 0.23% V₂O₅, for 46.3 Mt of graphite and 1.044 Mt of V₂O₅, while from 100-300m deep, the resource amounts to 700 Mt @ 10.2% TGC and 0.23% V₂O₅, for 71.1 Mt of graphite and 1.618 Mt of V₂O₅.

As this 117 Mt of graphite is almost twice current world reserves of 77 Mt (according to the US Geological Survey), Syrah intends to become the world’s largest producer of graphite and even have aspirations to exceed current Chinese production of over 1 Mtpa. At that level of graphite production annual production of V₂O₅ would amount to over 20,000 tpa of V₂O₅.

A scoping study using the Balama West resource is due for June 2013, probably after that all the other graphite hopefuls can probably go home and forget it. Their vanadium production, although still potentially significant, appears less of a game changer, although could still be twice Baobab’s level.

American Vanadium (AVC-TSX-V)

American Vanadium is developing the Gibellini vanadium project in Nevada, USA.

A sulphuric acid heap leach process has been proposed to produce flake vanadium specifically aimed at the battery storage market. To that end American Vanadium have a sales agreement with Gildemeister, a German solar power developer.

West Melville Metals (WMM-TSX-V)

West Melville is exploring its 100% Isortoq vanado-titano-magnetite project in Greenland.

IRC (1029.HK)

IRC, a Russian titano-magnetite miner and iron ore developer, is currently 51.2% owned by Petropavlovsk (POG). This will fall to 40.2% following stage two of a proposed transaction that will lead to majority Chinese control. Their Kuranakh titano-magnetite mine produces 900,000 tonnes per annum (tpa) of iron concentrates grading 62.5% iron and 160,000 tpa of ilmenite concentrate grading 48% TiO₂.

Rio Tinto (RIO)

Rio Tinto Iron & Titanium (RTIT) and its affiliates, mine ilmenite in Canada, South Africa and Madagascar, which is upgraded into a high quality titanium dioxide feedstock product. Co-products include high purity iron, steel, metallic powders, zircon and rutile.

Ilmenite is one of the primary sources of titanium dioxide (TiO₂), which is a very white, opaque compound that is an important pigment used in products

19th June 2013


such as paint, plastics and paper. TiO₂ reflects and scatters light like thousands of tiny mirrors, and when used as a pigment it gives brilliance and opacity to these materials. Other, smaller volume uses for TiO₂ include cosmetics, sun screen and toothpaste.

While TiO2 is bright white, ilmenite itself is brown or black, due to its iron content. RTIT processes ilmenite to remove the iron, and sells the resulting "titanium dioxide feedstock" products mainly to pigment manufacturers. Pigment manufacturers refine the feedstock further to produce a titanium dioxide pigment. Pigment manufacturers use two process routes - the chloride and the sulphate route - to produce TiO2 pigment, and Rio Tinto offers products to both sectors of the market.

Titanium dioxide feedstock is RTIT's primary product, but they also sell other products that are derived during ilmenite mining and processing. The iron that is removed from the ilmenite is sold as a high purity pig iron. Some of this pig iron is converted into steel billets, and iron and steel powders. They also sell some of the ilmenite ore to steel manufacturers as a product called SORELFLUX™ that helps extend the life of blast furnaces.

Ilmenite is mined either from hard rock deposits, or from accumulations in ancient beach sands. In Canada, RTIT's wholly owned subsidiary Rio Tinto, Fer et Titane, operates an open cast TiO₂ mine at Lac Tio near Havre-Saint-Pierre, one of the largest ilmenite deposits in the world.

Rio Tinto produces ilmenite from beach sand deposits at their 74% owned Richards Bay Minerals (RBM) operation in South Africa and from their 80% owned QIT Madagascar Minerals (QMM) operation in Madagascar.

TiZir Limited

Mineral Deposits (MDL-ASX) and Eramet (ERM-Euronext) each own 50% of TiZir Limited which owns the developing Grande Côte mineral sands project in Senegal, West Africa and an ilmenite upgrading facility in Tyssedal, Norway. The Tyssedal ilmenite upgrading facility smelts ilmenite to produce a high-TiO₂ titanium slag which is sold to pigment producers and a high purity pig iron which is sold as a valuable co-product to ductile iron foundries. The facility currently produces approximately 200,000 tpa of titanium slag and 110,000 tpa of high-purity pig iron. Once Grande Côte reaches expected average production rates, TiZir will be producing approximately 7% of both global zircon and titanium feedstock supply. Located almost at the end of the Hardangerfjord on the west coast of Norway, the Tyssedal ilmenite upgrading facility has been producing titanium slag (also known as upgraded ilmenite) and high purity pig iron (HPPI) since 1986. It is the only such facility in Europe and only one of five in the world. The current capacity is 200,000 tpa of titanium slag and 110,000 tpa of high purity pig iron

19th June 2013


The titanium slag is predominantly sold to pigment producers. The pigment producers themselves are only interested in the titanium dioxide (TiO2) contained in their feedstocks. The lower the TiO2 content of the feedstock and correspondingly the higher the impurities content, the greater the waste products that are generated during the pigment manufacture, which leads to environmental problems and associated costs. The smelting process at Tyssedal involves the extraction of the iron from the ilmenite with everything else reporting to the slag. The separation of the iron lifts the titanium dioxide content from approximately 44% in the ilmenite to approximately 80% in the slag. As a result, the pigment producer customers have less waste to deal with. The high purity pig iron produced as part of the smelting process (which is renowned for the low phosphorus and sulphur contents) is sold to a varied and large number of customers, and include manufacturers of windmill parts, automotive parts, engine parts, tools and heavy castings. Tronox (TROX-NYSE)

Following their acquisition of Exxaro Mineral Sands, they are now the world’s largest fully integrated producer of titanium ore and titanium dioxide (TiO2).

They are the third-largest global titanium feedstock producer, with approximately 10% of global titanium ore production; and the second-largest producer of zircon, with approximately 20% of global production. Their proprietary chloride process accounts for 100% of pigment production gross capacity and they are one of only five major producers of TiO2 with this proprietary technology.

Meanwhile, their electrolytic and specialty chemicals business provides innovative products to the paper and battery industries.

Tronox’s mineral sands operations are located at Namakwa Sands, South Africa; at KwaZulu-Natal (KZN) Sands also in South Africa and in Western Australia. Tronox’s Pigment production facilities are located at Hamilton, Mississippi, USA; Botlek, Netherlands and Kwinana, Australia. Electrolytic operations are located at Henderson, Nevada, USA; Hamilton, Mississippi, USA, while Tronox has corporate offices in Stamford, Connecticut, USA

Tronox currently has production facilities designed to produce approximately 465,000 tons of TiO2 annually.

19th June 2013


19th June 2013


Disclaimer

I Roger Bade hereby certify that the views about the companies and their securities discussed in this report are accurately expressed and I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.

Whitman Howard publishes investment recommendations, which reflect the analyst’s assessment of a stock’s potential absolute total return. Our research offers 3 recommendations: BUY stocks are expected to have an absolute total return of at least 20%. HOLD stocks are expected to have an absolute total return of between 0-20%. SELL stocks are those which expect to produce a negative return. The time horizon for which the recommendation is deemed valid is 12 months unless otherwise specified in the particular research.

Information relating to any company or security is for information purposes only and should not be interpreted as a solicitation to buy or sell any security or to make any investment. The Information in this communication has been compiled from sources believed to be reliable but it has not been independently verified. No representation is made as to its accuracy or completeness, no reliance should be placed on it and no liability is accepted for any loss arising from reliance on it. All expressions of opinion are subject to change without notice. Opinion may be personal to the author and may not reflect the opinions of Whitman Howard Ltd (“WHL”).

WHL’s Research publications are not for Retail Clients as defined by the Financial Services Authority (“FSA”). The information contained in research publications are obtained from various sources believed to be reliable, but have not been independently verified by WHL. WHL does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law. Research publications are for information purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of any securities, or for engaging in any other transaction. Research publications are not for private individuals. Any opinions, projections, forecasts or estimates in research reports are those of the author only, who has acted with a high degree of expertise. They reflect only the current views of the author at the date of the report and are subject to change without notice. WHL has no obligation to update, modify or amend any publication or to otherwise notify a reader or recipient of a publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in research reports were in no way affected or influenced by the issuer. The authors of research publications benefit financially from the overall success of WHL. The investments referred to in research publications may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in a research publication shall be the sole and exclusive responsibility of the investor and WHL accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in research publications may not be readily liquid investments. Consequently it may be difficult to sell or realize such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in research publications may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs or prejudices whatsoever arising from the use of research publications or their contents.

WHL has written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research business. Chinese Wall procedures are in place between the research analysts and staff involved in securities trading for the account of WHL or clients to ensure that price sensitive information is handled according to applicable laws and regulations.

United Kingdom: Research publications are for persons who are Eligible Counterparties or Professional Clients only and is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the United Kingdom only to persons of a kind described in Articles 19(5) (Investment professionals) and 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Any investments to which the research publications relate are available only to such persons, and other classes of person should not rely on the research publications. For the purpose of UK regulation, WHL produces both independent and non-independent research which is a marketing communication under the FSA Conduct of Business rules and has not been prepared in accordance with the legal requirements to promote independence of investment research nor is it subject to the prohibition on dealing ahead of the dissemination of investment research. However, the firm does have procedures in place to manage conflicts which may arise in the production of research, please refer to WHL research policy, which, inter alia, prevents dealing ahead. The research and conflicts of interest policies can be obtained from the Compliance Officer at WHL. Authorised and regulated by the Financial Services Authority No. 514466. Registered in England & Wales No. 06944529.

EU Investors: This communication is issued by Whitman Howard Limited (“WHL”). WHL is authorised and regulated in the United Kingdom by the Financial Services Authority in connection with its distribution and for the conduct of designated investment business in the European Economic Area. The registered address Whitman Howard Limited, 8th Floor, Marble Arch Tower, 55 Bryanston Street, London, W1H 7AA. Telephone: 020 7087 4550.

Other countries: Laws and regulations of other countries may also restrict the distribution of this report. Persons in possession of Research publications should inform themselves about possible legal restrictions and observe them accordingly.

Documents

BUY Baobab Resources Plc (BAO)