BROKER'S REPORT ARGONAUT- GO NORTHWEST, page-9

Hi@Poodleface, I think I might be able to shed a little light on your musingsabout why their valuation still sits @ $1.60. I read their report and thisencouraged me to start toying around with my own DEG NPV valuation last night.Their model is calibrating a very similar result to my own model although themechanisms in their model to get to the end result are somewhat different tomine. This Macdonald chap is a trained geo with some extensive miningbackground from what I gather whereas I am a humble accountant, come investorwho has learnt what I have learnt from years of reading mining stock forums andtalking to others more knowledgeable than me. This may turn into a bit of along post so apologies in advance.

Essentially even though we now have a JORC MRE, from a valuationperspective, once you stop valuing an explorer based on some multiple ofOzs discovered in the ground, with that multiple in turn being some sort ofcrude proxy for the general gold price, the location of the find, the likely miningcost and likely further discovery upside, you have to convert over to a moretraditional discounted cashflow analysis ( a DCF - which is how every industrial company is valued), where you assess possible future cashflows from mining ( involves obviously a guess of forward commodity prices and All-In Sustaining Mining costs (ASIC) ) against the capex costs of the mine, whereyou heavily discount the future cashfows through time for risk and the time value of money. I am being crude here but valuation approaches can tend to put layer upon layer of conservatism onto these things , not to mention the JORC code itself is adocument based on conservatism too, until eventually you end up missing the real upside. Its important therefore to understand what assumptions they are built on and which parameters really drive a change in that model's value. More on that later butwhen writing these for the professional guys it gets down a little to which type of error do you prefer to avoid in life ? Readers schooled up in statistics may have heard of Type 1 and Type II errors in Statistics. I hate to use Wikipedia as itsrun by a bunch of leftards, but here is a quick definition,

"a type I error is the rejection of a true null hypothesis (also known as a "false positive" finding or conclusion; example: "an innocent person is convicted"), while a type II error is the non-rejection of a false nullhypothesis (also known as a "false negative" finding or conclusion; example: "a guilty person is not convicted").[1] Much of statistical theory revolves around the minimization of one or both of these errors".

The above example is a good analog to what I am trying to convey so bear with me. Society would rather have much less Type 1 errors ( convicting an innocent person) than Type 2 errors, not convicting guilty people, hence we invented the idea of thepresumption of innocence. We can live with more of the latter if our reasoning stops us having more of the earlier so we purposely bias our thinking that way. Valuation methodology is somewhat similar, you would rather be extra cautious and missnot calling a long term winner than hang your neck out and call upside that never eventuates or more over people do their ass and lose their invested capital. As people are most often risk averse, people will value losses avoided much more highly thanpossible upside never achieved. Plus your upside from calling it right is probably minimal and hard to measure as a paid adviser but your downsize for calling it wrong could be large even with a professional indemnity cover. Hence the idea of conservatismcomes in strongly as a driving force with most valuation approaches. What you're seeing in that Valuation approach by Argonaut is conservatism baked into the model.

My NPV model valuation is similar too. A couple of days ago on this forum @jogo posted a table of how industry analysts convert resources over to a number you can use to estimate final mining Ozs, https://hotcopper.com.au/posts/54158156/single, I have repeated the table here for ease of reference .


I have always used a similar table in my calculations, the point but to my narrative being, yes its more conservatism that is being factored in. In the absence of more knowledge we have little choice, as we still don't know how much of indicatedand inferred is going to actually tip out until more infill drilling is done on the way to a bankable feasible study and even then residual risks will remain in an estimate. I have been on this thread before saying this is why the mining PFS now is soimportant as it will allow a more informed approach to valuing this thing rather than just throwing in a huge number of conservative variables. The 5:1 stripping ratio Argonaut used comes to mind here. The extra cost of the POX processing so oftenmentioned here by down rampers also comes to mind. A lot of analysts out there are working on a capex spend approaching or even over $ 700 M dollars. Argonaut are also working on a cash cost to mine of circa $ 1,100 per Oz (in part driven by the stripratio mentioned above) and an ASIC of $1,200 per Oz. That is reasonable but based off what knowledge we actually know but equally I think this may prove to be conservative in the fullness of time and the Hemi deposit could be circa $ 800 perOz cash cost to mine.

Valuation approaches tend to be more informative in my view when they are combined with sensitivity analysis of the major drivers of Value, then people can make informed decisions about how they think those drivers will bear out with the passingof time, and in turn this informs if you believe the risks in the valuation are to the up or downside. I will run through the most critical ones and show you how when I change them in my valuation model, how it flows into the final valuationcalculated. As my model is calibrating similar to Argonauts you can bet their models would give similar results.

My model starting point is a $ 1.60 per share valuation and the model gives this answer using a DCF based on the following key parameters, it assumes 9 M Ozs (6.8 M Hemi + 2.2 M Other in the Satellites), USD price of gold basedon $1780 per Oz current price, mining cost circa $ 1100 AUD for Hemi , but I allowed $ 400 per Oz extra for the other satellite resources ( extra cartage etc to Mill that likely will go near Hemi), Mine capex cost $ 700 M. Mining Ozs per year 300 K peryear or circa 19 year mine life. My model discounts the MRE Resource Ozs to an actual minable resource of 5.70M Ozs applying a table like Jogo posted the other day shown above, far different to 9.0 M , but its why I arrive at 19 years @300 K per year,and again with the fullness of time this may be ultra conservative. My model applied a 50/50 Debt/Equity mix to fund the mine and debt is payable at 7%, the rest comes with Equity and further necessary share dilution - another 350 M shares basedon Friday's close and likely discount to get further cap raises away. One isn't inclined to get too excited about $ 1.60 per share as a valuation but its what its not counting with the parameters set where they are where the real upside and excitementin my view comes in.

So what is likely to change ;

- Price of Gold @1780 USD. If your a gold bull, they see the price running to $3,000 USD in the next couple of years. Plug that in the model and the value per share is $ 3.74 . In fact the USD price of Gold is the most impactful driver by a mileand hence its no surprise our valuation is closely correlated with the price of Gold. I am not as bullish as some gold bugs but equally with inflation likely coming, I could see the USD price of gold easily getting to $2,000 USD per Oz. Plug thatin and you basically get $2 / share.

- Mine Capex cost - I don't feel the cost of POX will take us to $ 700 M capex cost. My best guess is still $ 500 M, plug that number in and you go up by $ 0.10/share, not much change obviously to $1.60. Honestly this is why I feel all of debatearound POX is a nonsense. Even if it is $200M more in cost , honestly its a bees dick in a proper valuation when you spread that extra cost over all these Ozs. Yer if we had a 2 M oz ore body, it could be a big problem and really undermine the project,but not here now with 9.0 M Ozs in the MRE.

- ASIC/Cash cost to Mine - this is the one I am keen to know as its an impactful driver. Not as much as USD price of gold, but it still moves the needle a lot on valuation. This is why I keep banging on about it when I post. You cut cashcost to Mine by $ 300 Oz and you drive another $ 0.40 per share into the valuation. There is a real chance in my view given the shallowness of the Hemi resource and the Ozs per vertical metre, we could be well below the current $1,100 per oz that firmslike Argonaut are using.

- Size of the resource - this is the other major key driver. Its why they need to both firm up a mining plan and hopefully keep extending the known resources at Hemi and hopefully find more Ozs at both Greater Hemi and possibly along trend with HemiV2 etc. My gut is telling me with the nearby Scooby and Duicon and Eagle etc, another 3.20 M Ozs could easily be firmed up over next 2-3 years , without even counting a possible Hemi V2 somewhere further along trend. This from memory would take usup near the levels the board have incentivized management to get to, presumably based on the premise it is very achievable. The mine capex cost is already paid, so the extra ozs could have no extra capex drag however the more likely scenariois with some additional capex they can accelerate the mining plan and you morph from 300 K per year to something closer to 400 K or 500 K Ozs mined per year. By accelerating your cashflow you give your NPV valuation a real kick along. The additional capexcost but for the extra Ozs would be in my view minimal. Drop in an extra 3.2 M Ozs to the MRE ( remember the model still discounts it back to about 57% of your starting point though in time that number will also go up as more resources move frominferred to indicated), some extra capex , say another $ 100 M ( again this could be conservative, the hidden theme of this post as its everywhere when valuing stuff) and move the mining plan to 400 K per year and your at $ 2.10 per share valuation.

- so if you think all of these changes are more likely than less likely , you can quickly see the upside here from yesterday's closing price of $1.20. If you start to add these factors together but ( in each case above I held all the others steadyat the starting pointwhile changing one ) , and again that's not improbable, the upside looks strong. For example, I think all 3, higher gold price, lower cash cost than Argonaut are predicting and more Ozs are all more probable than less probable invarying degrees. If I throw in my median guess on all 3 at the moment, of $ 2,000 USD Gold price, $ 900 Cash mining cost at Hemi and that we do indeed get to 12.0 M Ozs in resources over the next 3 years , the model comes out at $ 3/share. None of thatis certain obviously but I would rate it as more probable than less probable, others will obviously have much different views.

The argonaut valuation can't obviously be so bullish or paint such possible upside as its open to mis-interpretation and leaving them open to being sued whereas I am just a humble but not insignficant holder throwing up unsolicited views onhotcopper. The language used in their analysis also is about as exciting as drinking tepid teawater which also doesn't help but it is how these documents are written. So essentially it's the conservatism built into these style of analysis as to why youdidn't see much movement in it from the recently announced MRE. Absent another major announcement on say Scooby or Duicon/Eagle , the valuation upside from here is going to be equally driven ( if not more driven) by an informed understanding of the miningeconomics as much as further possible resource upgrades and until we see the PFS due out in the coming months, we are all just guessing to some degree on the mining economics. While that prevails, ultra conservatism in some of these valuations will continueto hold sway. I hope this post was helpful in why their valuation didn't change much but equally I hope it demonstrates a lot of possible upside does remain from here. But it would remiss of me not to say in closing don't take my comments as gospel,DYOR.