TORRIDON INVESTMENT

CASE ANALYSIS

a Guide to Us page 1

Investment Case Analysis guide pages 2-3

Details & Evaluation pages 4-5

Analysis pages 6 to 15

Compiled on April 23rd, 2018 in Budapest, Hungary

Firesteel Resources a pre-production stage golden opportunity just

emerging in Finland with a unique real-asset

arbitrage opportunity one should not miss

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Torridon Investment Research

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Torridon Investment Case Analysis

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Case Analyst: Rába Zoltán Tamás head of trading strategy, chief economist

Company: Firesteel Resources Inc.

Country&Currency: Canada, CAD

Ticker/Exchange: FTR:CN / TSX – Venture

Corporate webpage: https://firesteelresources.com/

Business line(s): Exploring/developing: gold

Manager, title(s): Michael Hepworth; president & CEO

Last contact date: March, 2018

Last contact type: meeting, Budapest - Hungary

Coverage history

Case report originally created: April 23, 2018

Evaluation of business case: it is very rare that my initial impression on a freshly introduced

gold (or in general: any commodity for that matter) company would be so favourable than the

one I gained on Firesteel upon meeting its top manager in Budapest back in March, 2018. This

Canadian company is the best example of smart bottom-fishing for good projects and attached

assets. Also for a cunning way of financing their capex needs to kick start production. In

essence: they bought a value of 2-3 hundreds of millions of USD for a fraction of that and will

repay the borrowed 20m USD to start it from ongoing CF. All details in the analysis. They also

sport a well above-average management team that keeps finances and spending is tight

control. Always a welcome feature, so often touted, but much rarely realised in real life.

Firesteel practices what they preach. I like that.

My assessment based on what I have seen and digested is that Firesteel is a rare gem in the

vast junior commodity explorer/developer scene. Consider this: 1) they have a proven deposit

with an established mining history. 2) they have a ready-made mine and processing plant,

where just the replacement value of the real assets in place is well above 100m USD, probably

200 or even 300m. They have the lot with lock, stock and barrel. And all this for bargain

basement bottom fishing prices. 3) they already have the money to bring it back to full

production and they can use ongoing future production to repay that. I mean: for me it is a

double-sided arbitrage. A 1) real asset one and another one on the 2) liability side.

Also noteworthy is that their all-in-sustaining cost (AISC) is just 850 USD/oz, thus they have a

very convincingly strong puffer against a potential adverse turn in gold prices. Just do a simple

and very rough math now. They plan to mine 600k oz gold. If the LoM average gold price will

be 1350 USD/oz, then their economic profit will be a round 500 USD/oz. That would generate

for the entire LoM a total nominal pre-tax CF of 300m USD. With the prevailing Finnish

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corporate tax in place that yields an after tax profit of 240m USD. Their market cap right now is

11m USD. Again: do the math and buy. And so it soon.

Given all the above considerations I issue to Firesteel Resources Inc. an unreserved 4

investment grading with a positive outlook. It is not five only for one single reason. They do not

have a sustained CF yet. And I, being a well-known rules-based investor and trader, never

deviate from my rules. I mean: never. I issue 5 stars only to those who deserve it on a

fundamental basis, where the market confirms the fundamentals (technical picture) AND they

have self-sustaining cash-flow. Firesteel has both the fundamentals and the technicals right. But

at the moment lack the CF. However, they will have the CF right soon. And then I will award

them the five stars …

I recommend the stock on both the 1) normal speculative and the 2) long-term value

investment level in the general commodity and trust currency (precious metals) categories. In

that latter sense, even mid- to low-risk profile clients may be advised to hold the stock as a real

asset protection against reflation and credit events, as well as insurance against fiat-money

related monetary policy exposure.

Verdict for IC:

I have already included Firesteel Resources in my own competency universe. Investment volume, mandates and timing are at my discretion according to current Compliance Pronouncements.

I also recommend Firesteel Resources to be included in the global company investment universe for the entire equity desk in the Asset Management business line.

Also recommend them to be considered for the Managed Accounts business line in the Vol-3 and 2 (highest to moderate risk) categories. Private bankers will receive a copy of this document in 48 hours. I will keep IC updated on their flow and exposure if any.

Risk Management level: Level 3 - without reservation.

Warning: legal and contractual limits may apply; each manager is responsible for contacting Compliance before investing.

Private Bankers should contact their respective Clients and explain them the case, in case of need, I am of further assistance both in writing and/or in person.

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Company overview

Firesteel Resources is the classic example of relatively small, but energetic company with a

clear vision being able to move a much bigger stake. With a 15m CAD market cap Firesteel truly

has a project worthy of its multi-hundred million market cap peers. And if all goes like it did so

far, the company will indeed have a market cap in the hundred million CAD club. That is the

reason I recommend the stock to be included in the company level investment universe and

also for the wider client base (advisory & research included).

Firesteel is a Canadian TSX-Venture listed company with a very experienced and able

management team. They were originally pure gold explorers operation mostly in Canada. As

constant sniffers and men with open ears, the two top man of the company: Michael Hepworth

and Basil Botha came across a group who were looking to sell a past-producing gold asset in

Finland. The fully-permitted Laiva Gold mine was in receivership, boasting a whopping 325m

CAD of prior exploration and development spent. The sellers were motivated to divest, but only

to professional specialists in the gold sector. As Michael and Basil executed their due diligence,

they realized Laiva was a top-tier asset, and was a victim of incompetent operators and a

tumultuous bear market.

Consider only one element of the asset. The mill is only two years old, it is brand new. It is of

high quality and has a liquidation value of 100m CAD. As Michael told me during his visit to

Budapest, the previous operator’s poor mining practices resulted in a lack of metallurgy, poor

grade control, and severe dilution. This all led to low mill capacity utilization and throughput.

Operational costs spiked, and due to low gold prices and substantial debt, operations failed in a

mere two years. A story we see all too often. Well: the operators failed but not the deposit and

the operation built on is. Through the advice of Firesteel’s mining and geological consultants,

and a turning gold market, Laiva is poised to be a very profitable gold mine, and one with

substantial exploration upside.

In June 2017, Firesteel signed a joint-venture with Nordic Mines AB (NOMI) to operate the

Laiva Gold Mine. The underlying premise of the agreement is for Firesteel to provide the

financing and resources required to restart the mine. This included an investment of 20m CAD

in stages to acquire 60% of the JV, with the eventual option to acquire the remaining 40% for

the fair market value in cash or shares. By now Firesteel completed both stages and the

acquisition of 100% of the Laiva Mine is complete.

After analysing the deposit characteristics, the already existing project assets and the nature of

the resulting cash-flow, it is my firm believe that Firesteel is undervalued in all metrics and I

am confident that it will be the next mid-tier producer in Europe. In a matter of 2 years it

may well be trading in the dollar (CAD) range. Now it trades for a mere 10 cents. Do the

math – and buy now.

Management

At the helms of the company as CEO and president stands a real industry veteran: Mr. Michael

Hepworth. He is an accomplished entrepreneur and business leader with more than 35 years of

diverse international business experience. Mr. Hepworth has started and built 5 successful

businesses from the ground up. He also consulted and advised businesses, in many sectors

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including professional and financial services, high tech, engineering and manufacturing. Mr.

Hepworth has over 8 years of corporate development experience in the resources industry. He

is experienced negotiator of technology agreements, corporate acquisitions and divestitures. At

the moment Mr. Hepworth is president of Firesteel Resources Inc. and director of Condor

Precious Metals, Canadian Iron Metallics and Alpha Resource Management.

The technical leadership of Firesteel is also iron-clad with Mr. Greg Sparks in charge of Mine

Engineering and Production. Mr. Sparks, a registered professional engineer, with more than 40

years of diverse open pit and underground mines experience. His background includes

operating management, engineering and financial analysis. Greg is a Qualified Person under NI

43-101 and Competent Person under CRIRSCO. He has worked for major companies, including

Echo Bay Mines Ltd (now Kinross), where he served as Development Group Vice President, as

well as for mid-cap and junior mining companies. Currently Greg serves as managing director –

Metals on a world-wide basis for the John T. Boyd Company, a large privately held mining and

geologic consultancy with multiple domestic and international offices. Mr. Sparks has a B.Sc. in

Mining Engineering from the Missouri School of Mines.

Firesteel has a remarkable executive chairman, Mr. Basil Botha. He brings in the operation more

than 30 years international mining and marketing experience. Mr. Botha has extensive

knowledge of the metals markets in Asia, North America, and Africa and brings significant

company building experience. Mr. Botha is currently chairman and CEO of Latin American

Minerals and chairman of Lithium Energy Products. He is past chairman of Lithium America’s

(“LAC”) and past president and Chief Executive Officer of G4G Resources Ltd. All of which are

listed on the TSX or TSXV. He holds an MBA from the University of the Witwatersrand, South

Africa.

the Laiva Project

The Laiva deposit is located in Raahe, Finland and is one of the largest gold resources in the

region. The mine is a conventional open pit mine with 2 pits. Exploration in the Laiva area

started in 2005. Previously the area was worked by both Endomines Oy and Outokumpu. The

operation includes two pits and a recently constructed 6,000 tpd, state-of-the-art process plant

designed by Metso and constructed by Outotec. Historic expenditure on the property is

estimated at 220, EUR. The mill and leaching plant was completed in 2011. Mining at the

property was initiated in Q3 2011 and the first doré bar was cast in December that year.

It is one of the largest gold resources in the region. The mine has excellent access to local

infrastructure, including grid power (110 kV line), paved all weather roads (within 5 km) and

port (within 20 km). All mining infrastructure in currently in place and the mine is planned to re-

open in August 2018. Finland was declared as the World’s 6th best country for property rights.

(Forbes Dec 2016), ahead of Canada and USA. Finland has a 20% corporate tax rate and gold

producers pay only a 0.15% royalty per annum.

Firesteel’s objective on this project is to become an 80k oz per year gold producer. At present

they have a 43-101 compliant resource base with 151k oz gold in the Measured & Indicated

category with an average grade of 1.237 g/T. Another 445k oz in the Inferred category with a

slightly higher grade of 1.531 g/T. Given their annual production objective, if all resources

prove to be extractable reserves, then it is 600k oz to be produced that yields a 7.45 years Life

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of Mine (LoM) with the annual 80k oz production. The new 43-101 resource estimate (August

2017):

Before going ahead into the finer details of the project and its financing, a few notes on the

jurisdiction and the region Firesteel is operating. Finland is a traditional mining-friendly country

endowed with a strong mining heritage. It also has super low political risk and highly skilled and

educated workforce. The country has favourable and clear mining, exploration and mining

regulations combined with world class infrastructure. In these regards it is similar to its two

Nordic neighbours: Norway and Sweden. No wonder that in the past year we might have

witnessed a proliferation of gold mines in the Nordic region: Including Laiva, 8 gold mines are

located in Finland and Sweden. In addition, the Swedish company Boliden produces gold from a

few “multi mineral” mines across Sweden. The largest mine in terms of gold production and

reserves is Agnico Eagle’s Kittilä mine in northern Finland. See locations on the below map:

The Laiva mine is ready to restart production. All asset and infrastructure elements are in place

including a 2 mtpa, almost new, high quality, autogenous mill and plant. See the site below:

Classification Au g/t Tonnes Contained Au (ozs)

Measured 1.132 355,000 13,000

Indicated 1.248 3,442,000 138,000

Measured + Indicated

1.237 3,797,000 151,000

Inferred 1.531 9,030,000 445,000

Svartliden

Dragon Mining

Boliden area

Boliden

Pahtavaara1

Lappland Goldminers

Pampalo

Endomines

Laiva

Nordic Mines

Vammala

Dragon Mining

Björkdalsgruvan

Mandalay Resources

Kittilä

Agnico Eagle Mines

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Some background history on the mine. First see the mill throughput to run of mine grade:

Also, take a look at the historical gold production:

-

0,20

0,40

0,60

0,80

1,00

1,20

1,40

-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

1 2 3 4 5 6 7 8 9

T

Mill Throughput ROM Grade

GPT

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I must also add that it is not only the existing pit that can deliver gold (albeit it alone is a big

hit). There is an exploration upside along two dimensions. The first is in the existing operation

in the north and south pit areas. Both are open at depth. The second option to expand is new

areas south of the existing Laiva mine: the Musuneva and Kaukainen areas. They lie in easy

Transport distance (2 – 3 km) to the plant area. The show the same geochemistry signature as

Laiva does. They also have the confirmed style of mineralisation same as in Laiva. And they

also hold a high potential for new open pits with the same economics as the original Laiva pit:

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Michael told me that in case of a potential resource extension, the effect would not be manifest

in the increase of the rate of annual production (it would be kept at 80k oz/year), but rather in

the extension of LoM. I assess it as a sign of rare good thinking aimed at a longer-term

sustained profitability and going concern. The schematics of the processing plant in place:

Project economies

Even a brand new ready mine and processing plant needs some money to put it back into

production. Assets have to be checked and mended if need be. The mine has to be checked

and refurbished at some parts. It needed dewatering (started in January 2018). Also, additional

infill drilling was required to increase confidence and fine-tune the target areas for the re-start

of the open-pit extraction. And so on, all is well known. All in all it cost 20m CAD (15m USD) to

restart production. So Firesteel had to come up with a quick financing, but also one that does

not dilute this golden opportunity.

I think they did a great job on that, just like on the asset side. So Firesteel wasted no time in

securing the financing for the capex, just a couple of months after the real-asset deal, it

announced the signing of a definitive agreement with Pandion Mine Finance LP for a financing

of 20.6m USD via a prepaid forward gold purchase agreement. Pandion is a freshly established

company, a financier of junior mining companies in North America and Firesteel is their fourth

client in this respect.

The funds were already received by 8th of December, 2017 so Firesteel could start all necessary

works on the project. The feature of the deal I especially liked (being an ex-financial structurer

myself) is the way the repayment is structured. First, there is a healthy grace period. There are

1.

2.

3.

4.

5.

Crushed ore is collected in a storage facility

Improved leaching and cyanide recovery based

on sound metallurgy

Improved grinding based on sound

metallurgy Improved gold room efficiency

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no repayments until May 2019. By that time Firesteel will be in full steam of producing doré

bars and generating a consistent CF from its gold sales. From that date onwards the repayment

takes the form of 20% of their production (67,000) ounces less a discount over 60 months. In

that context Firesteel sends the gold concentrate to the refinery, which trades up to 20% of the

annual flow on Firesteel’s behalf to Pandion with a 500 USD/oz discount to the prevailing

market price. It yields a nominal CF to Pandion to the tune of 33.5m USD (as they make money

not on the gold price, but the discount/oz). So there is certainly a strong interest rate element

embedded in the deal, but risk taking on the part of a bona fide financier must be appreciated.

Considering that this single deal has solved all the capex and even opex needs of Firesteel and

enabled it to restart production, I judge that the agreement with Pandion was essential in

moving forward. I also believe the deal was indeed attractive and mutually beneficial. While

Pandion will be the beneficiary of 67,155 ounces at a discounted price, I contend it is close to

insignificant to Laiva’s true scale. It currently has 600,000 ounces in resources to draw upon

and given the various expansion options I would not be surprised that when updating this Case

Report a year from now I could present Firesteel as a 1m or even above ounce deposit

endowed gold miner. And I wish I could.

There is even more juice to this already quite tasty commodity cocktail: Firesteel not just enjoys

the real asset arbitrage opportunity of owning a 220m EUR sunk capital in the context of a

bottom of cycle type acquisition. It also secured a hefty 80m EUR tax loss approved by the

Finnish government. I will actually contact Michael for more details (conditions, drawing

triggers, maturity if any, etc.) on that. But such a tax credit is always welcome in any

jurisdiction where corporate earnings are taxed (where not?).

In terms of realising their plans Firesteel also scores in the upper quartile of their league. They

delivered on all of their milestones so far on schedule. The path to production timeline:

1-Nov-17 2-Dec-17 2-Jan-18 2-Feb-18 5-Mar-18 5-Apr-18 6-May-18 6-Jun-18 7-Jul-18

Staffing

Environmental Studies and Permit Amendments

Mine Design and Plan update

Mine supplies and contracts

Mine Pre-production: dewatering, PAG dumps…

Mine Production

Mill Design and Plan update

Lab facilities

Mill Installation, Repairs and Comissioning

Tailings Handling and Storage: Design and Plan…

Mill Production

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There are just a few steps left till CF generation already this year:

• Pre-feasibility study - April 2018

• Start of mining – May 2018

• Start of production - July 2018

Also noteworthy is that their all-in-sustaining cost (AISC) is just 850 USD/oz, thus they have an

ample puffer against a potential adverse turn in gold prices. As a closure on the project

economies section, just do a simple and very rough math. They plan to mine 600k oz gold. If

the LoM average gold price will be 1350 USD/oz, then their economic profit will be a round 500

USD/oz. That would generate for the entire LoM a total nominal pre-tax CF of 300m USD. With

the prevailing Finnish corporate tax in place that yields an after tax profit of 240m USD. Their

market cap right now is 11m USD. Again: do the math and buy.

Finances

End of March they had 12.8m USD in cash. Out of which 4.5m USD was earmarked for capex

and the rest is kept as working capital puffer. Note that end of April the company was valued

by the market at 14.6m CAD, that is: 11m USD. Less than their cash position. Sure: they have

debt outstanding, but it is spent mostly on hard assets, so it is activated on the book on the

asset side. So in my view their present market valuation just does not make sense with that

much cash in hand. But who said that the market always makes sense… ? For my purposes, it

is enough for the moment if I can make sense of the excellent value proposition represented by

Firesteel.

Shares

The company share structure is not complicated, another good input in my evaluation:

Their 30 days average volume is 50k shares that is not overly large but is definitely amenable to

a smooth and focused buying program aimed at establishing a long-term position in the

company. It is actually rather acceptable in the junior commodity segment.

February, 2018

Common Shares O/S - 146,042,955

Options O/S @ $0.10 - 6,250,000

Warrants - 14,099,354

Convertible Debentures - 4,190,000

Fully Diluted (excluding exchange option) - 170,582, 309

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Technical picture

It is obviously quite clear by now that for me, on a fundamental basis Firesteel is an instant

buy. The question is timing. I think that they are so close to production and thus: a very

favourable and market awareness rising news-flow, that there is not much room for

contemplation and waiting for the entry price to improve by… what?... by 1 or cents? It would

not make sense. It is a bargain right now. It is a mere 10 cents right now. The issue, any

sensible investor should concern himself is not whether his entry price is 10 or 8 cents. The

issue, any intelligent investor should concern himself is whether to sell it before it becomes a

dollar share or sell it on the fast profit after the price is doubling or tripling on the share. When

it comes to timing, I am usually technical and if and when possible (have the insights) also

sensitive to the news-flow. That latter one I cannot predict and see. But I can see and read and

interpret the chart:

The stock is trading in a choppy manner, but the long-term trend is a clear upside that

temporarily turned into a range trading consolidation pattern. It is entirely like the range trading

in 2H of 2016 to 1H of 2017 after the sharp rise in 1H of 2016. To me, the seasoned chart

reader and technician, it is the (perfect) calm before the surge. There is clearly a supply

overhang, but it is easing as the company is nearing production. The very reliable MACD line is

oscillating but just broke its signal line recently, and not the first time in 2018. That is usually a

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good sign of a sort of “impatient” market, that wants to rise, but supply temporarily forms a

resistance. And where are we now? Exactly at the magic 10 cents line. As soon as supply

exhausts itself here and the fundamental news-flow confirms, the market price will follow suit.

Given all that: the vast array of both fundamental and techinal considerations and reasons, I

am absolutely bullish on the Firesteel value proposition and thus the stock.

Conclusion

So to sum up my case: I think Firesteel is a rare gem in the vast junior commodity

explorer/developer scene. Consider this: 1) they have a proven deposit with an established

mining history. 2) they have a ready-made mine and processing plant, where just the

replacement value of the real assets in place is well above 100m USD, probably 200 or even

300m. They have the lot with lock, stock and barrel. And all this for bargain basement bottom

fishing prices. 3) they already have the money to bring it back to full production and they can

use ongoing future production to repay that. I mean: for me it is a double-sided arbitrage. A

real asset one and another one on the liability side.

Arbitrage is such a basic and trivial “must use” opportunity that back in the 1990s when I

attended the State University of New York at Albany business school, my finance professor told

us that “anyone after graduating from this school and especially my class and later in your life

not using an arbitrage, should be publicly hanged on Wall Street”. That time I was a sort of

amused by this, but 20 years of trading and investment taught me of the wisdom and virtues of

this bon mot.

For all professional inquiries, please refer to:

Mr. Rába Zoltán Tamás

head of trading strategy

Torridon Investment Research BVI – Hungary https://torridonresearch-com.webnode.hu/ rzt@torridonresearch.com

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