Dr Chris Baker

January 2018

Kingston Resources Ltd (KSN AU, $0.024. Market cap A$24m)

Revisiting the Umuna deposit with an initial 2.8Moz JORC resource ‘Shadow of the headframe’ exploration potential at Misima

Investment overview

• KSN has acquired 49% of the Misima gold project and will move to 70% within months. The

Misima deposit was one of the core assets of former gold major, Placer Pacific in the 1990’s.

It consistently delivered around 300,000 low cost ounces in its early years from a large scale,

low grade open cut, until mine closure in 1999 with the gold price under US$300/oz. There

has been little significant exploration undertaken for gold on Misima for over 15 years.

• In a review of existing drill data, KSN have established a JORC resource of 2.8 million ounces

(82.3Mt at 1.1gpt, 46% in the indicated category). This we judge is an excellent base from

which to build a stronger resource to allow the start of a scoping study for mine

development.

• Exploration targets include extensions of the main Umuna lode, particularly to the north, and

splay structures in the SE. We are also attracted to the depth potential of the main Umuna

lode where a small number of deeper drill holes suggest that gold grade might increase with

depth.

• An experienced exploration team has been mobilised. Trenching of key targets has already

begun and assays are awaited. Drill testing is likely to commence in March 2018.

• We present a case where production of 170-180kozpa could be imagined at second quartile

cash costs. However, it is far too early to establish the production outlook for a project such

as this, and also the ultimate capital cost.

• We can see a short to medium term price target of 4 to 7cps as reasonable, based on a

comparison with KSN’s peers. But to stress, KSN is very much an exploration play. Additional

gold resources will likely be required to bring Misima back into production.

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Background

In December 2017 KSN merged with Canadian WCB Resources. WCB had been principally exploring a copper porphyry on Misima Island in PNG located to the north of the old Placer Pacific open cut gold mine. Results were disappointing. Investors were reluctant to continue funding WCB.

KSN saw the gold potential of the old Misima gold mine as an opportunity, and proposed a ‘merger of equals’ with WCB Resources. This was completed in late November 2017.

The merged company holds 49% of the Misima project, and is earning its way to 70% with the expenditure of a total of A$9m. (Around $1.9m remains to be spent). The 30% JV partner, Pan Pacific Copper, is owned by Japanese majors, JX Nippon Metals and Mitsui Mining and Smelting.

Since completion of the merger, KSN has upgraded the resource by some 22% to 2.8Moz (at a 1.1gpt grade) with the incorporation of deeper drill holes and with the application of JORC reporting, and has commenced exploration of the main Umuna lode and other targets on the island.

The company

Post-merger, the company has 1009m shares on issue, and a market capitalisation of around $24m. Cash was $3.1m at 30 September 2017.

Kingston’s executive management is led by ex-fund manager, and engineer Andrew Corbett. He is supported by Andrew Paterson who is coordinating exploration, and commercial manager Chris Drew. Recently appointed exploration manager, Michael Woodbury, was involved in exploration at Misima with Placer in the early 2000’s, and will no doubt contribute strongly to the understanding of the deposit.

Note that a number (around 21m) of performance options and rights were issued to the board and key executives at the recent AGM. We have not diluted for these options as they are all subject to performance hurdle.

The assets

The Misima project

• Misima was one of Placer Pacific’s best mines in the 1990’s. It was an open cut gold-silver

mine on an island in PNG that produced ca. 250-300kozpa for +10 years at low cash costs. It

was one of the premier mines in the Placer Pacific stable, and produced some 3.7Moz gold

and 22Moz silver over its 15 year life. The mill shut down in 2004. Discussions with previous

management confirmed that the low prevailing gold price at the time (ca. US$300/oz) would

not have allowed another cutback of the main pit. The mine was visited on many occasions

by analysts. This author visited the mine on numerous occasions in the 90’s. It ceased

mining in 2001 and treated low grade for 3 years. The plant was sold and the mine site

rehabilitated.

• Misima was only ever a low grade mine, starting production with a reserve of 56Mt at

1.38gpt (at a 0.7gpt cutoff grade). However, the mine consistently delivered profits and

cash. The strip ratio was low, rock was soft and the metallurgy simple (the Merrill Crowe

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process was employed due to the high silver content). The mine is reported to have

generated a +20% call factor on tonnes and grade.

• The mine was a jewel in the crown of the Placer global operations in the 1990’s, consistently

being one of the company’s lowest cost producers with a life-of-mine average of US$218/oz.

Typical of Placer operations at that time, the miners selectively delivered higher grades to

the mill, stockpiling low grade ore for processing at the end of the mine life.

• One of the key cost advantages of the mine was its ability to undertake marine discharge of

tailings, eliminating the need a tailings dam tailing dams. Environmental consultants

monitored the behaviour of the largely benign waste products, and consistently gave it the

‘thumbs up’. Some of the waste was discharged into the sea as well, while much found its

way back into old pits and into nearby waste dumps.

• The decision to close the mine was late 90’s when gold hit $250/oz. Following the political

turmoil in the 1990’s, Placer hated PNG. So, it’s easy to imagine why the company didn’t

look for reasons to keep the mine open.

Geology of the Misima orebody

The main Umuna orebody appears to be fault-hosted within Cretaceous/Paleogene metamorphic

rocks. It is believed to be a dilatational jog within a 3km long fault/breccia zone.

Source: The Geology and Mineral Potential of PNG, Corbett (ed). 2003

Epithermal mineralisation in the Umuna lode is characterised as two styles. A low sulphidation

carbonate-base metal phase is commonest and is hosted within a multiphase extensional breccia.

Minor base metals are common. The high silver is thought to have been derived from the near-

surface oxidation of silver-bearing sulphides.

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The remnant Misima resource

• WCB undertook several NI43-101 compliant resource estimates on the remaining gold

mineralisation and at 0.5gpt COG the last reported was 73Mt at 1gpt for 2.3Moz .

• Since its acquisition, KSN has revisited the resource estimate, and incorporated a number of

drillholes which had not been used in the earlier estimate. The new resource estimate is as

follows, with the headline 2.8Moz reported for a 0.5gpt cut-off grade:

Source: KSN announcement, 27 November 2017. See Appendix 1 for more detail.

• Note that 54% of the resource is currently in an inferred category.

• What is interesting in these results is the relative steepness of the grade curve. As in its past

life, there appears to be the potential to selectively mill higher grade ore, and stockpile the

lower grade material for later processing. (This is referred to as grade streaming).

Source: KSN announcement, 27 November 2017

• It is interesting to note that at a 0.4gpt cut-off, while the grade drops to 0.9gpt, tonnes

expand to around 110mt, for some 3.2Moz. We are not suggesting that a 0.4gpt is ‘the right

number’ but it does show how sensitive reserves might be to project economics.

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Where did the additional resource ounces come from?

The recently added 800koz in resources emerged from 2 sources:

• The incorporation of drill results previously not used in the estimate, and

• The difference in resource classification methods between Canadian NI41-101 and JORC.

JORC has a ‘reasonable expectation of being economic’ test around mineral in the ground.

The 43-101 report requires a conceptual mining method (in this case a conceptual open cut).

The shape of this open pit will have been based on reasonably conservative pit dimensions,

given this project is nowhere near at a scoping or PFS stage.

The plan below shows that most of the incremental ounce emerged from beneath the existing

resource (“Umuna US$1200 pit shell” is the 43-101 resource), with a little more to the north and

some in the east Umuna lodes/

Note that around 220koz of 2.8Moz resource is associated with a nearby satellite deposit,

Ewatinona/Quartz Mountain, which was mined by Placer in the late 1990’s.

It is worth noting that the resource consultant identified a further 10-20Mt at 0.8 to 1.2gpt as an

exploration target. This 257 to 772koz target is very much that, and there has been insufficient

drilling to define a resource.

Exploration opportunities

• KSN has presented the opportunities for further resource ounces into 4 groups: the two

deposits with existing resources, the old Umuna and Quartz Mountain pits, Umuna East and

Misima North.

• In total there are over 7 kilometres of strike potential to be evaluated.

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• Not to say that previous owners (Placer in particular) did not undertake regional exploration.

They did. But a sub US$300/oz gold price and political uncertainties in PNG might well have

seen the precious exploration dollar directed elsewhere.

Misima – Umuna and Quartz Mountain lodes

• The down dip extension of the Umuna lode likely represents the ‘easiest’ additional ounces.

Moreover, there seems to be a suggestion that grades might improve at depth.

• Looking back at the long section above, we can see a smattering of deeper drill holes (400-

500m), testing down-plunge extensions of the richer section of the orebody. Grades

reported are over twice the resource grade. The section below is though this zone.

Source: KSN corporate presentation, September 2017

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• Other comments in the technical literature refers to marked primary zonation at depth.

(References available on request). One particular piece of research refers to a move from

low iron sphalerite (zinc sulphide) nearer to surface, to higher iron sphalerite at depth. The

epithermal experts will say that this is low temperature moving to higher temperatures of

deposition. And with that might come differing grades and differing ratios of gold to silver.

• So is it possible that grades will consistently improve with depth. This is a completely

reasonable exploration model which is yet to be tested.

• Note as well that the old Umuna pit was part-filled with waste. So, there will be additional

cost required to access the deeper ore.

• At Quartz Mountain, KSN report that mineralisation remains open at depth. The average drill

hole depth here was only 90m.

Umuna East and Misima North targets

• The historic soil geochem plan, above, shows the exploration opportunity here.

• Umuna East seems to consist of splay structures of the main Umuna lode. Here the

exploration opportunities are over a 2 to 3km strike, with historic trenching, and limited

drilling suggesting the potential for moderate grade mineralisation near to the surface. KSN

reports two zones of mineralisation in the splays, one 40m at 1.19gpt the other 90m at

1.65gpt. These are believed to be undrilled. Exploration success here could be very

important, as it could deliver near surface, low strip ounces, which could assist the average

stripping ratio of the main pit itself.

• The Misima North targets represent a 3km plus potential extension of the Umuna lode. This

target is supported by underground historic mining and surface geochem.

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To stress, its not to say that these targets were not drilled during the Placer era. As the following

plan shows, exploration was very much focussed on the Umuna deposit itself. Much of the

extensional exploration was undertaken using RC drilling, not an issue in itself, but clearly the drill

spacing is considerably wider, and quite possibly shallower.

Source: AMC Technical Report, September 2013

Initial review of the exploration data by KSN’s geologist suggests there are a number of geochem

anomalies and trench samples that remain untested. No doubt the geologists are in the process of

compiling all historic data, and as announce on 13 December, have mobilised a field team with the

immediate commencement of trenching.

Drilling is scheduled to commence “early 2018”.

Misima…what could it be?

The old Misima Mine, its satellites and surface gold anomalies deserve further exploration. From

what we have seen of historic reporting there has been little attention paid to the gold potential of

the island. Previous explorers, WCB Resources, were focussed on the area’s porphyry copper

potential. (This was a valid target, but results were disappointing). So often have we seen gold

mines of the 70’s, 80’s and 90’s revisited with a drill rig to see substantial additional reserves

identified.

The 2.8moz of measured, indicated and inferred is a great place to start. An aggressive drill

programme should rapidly upgrade the inferred resource to M&I, thereby allowing some preliminary

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economic scoping studies. Remember, Misima was an exceptional mine for Placer in the 90’s:

simple geology, simple bulk scale mining and no-nonsense metallurgy. This is a good place to start.

Simultaneously, the geologists will be looking hard for higher grade satellite deposits to provide

additional mill feed.

It is far too early to speculate as to what “New Misima” might be. But unless the project passes an

initial sniff test, it would not be worth our while spending time.

Resource potential: let’s assume that exploration in 2018 and possibly 2019 delivers a M&I resource

of 2.8Moz plus 25% = 3.5Moz.

Reserve potential: let’s assume a 60% resource to reserve conversion, so reserves on this basis

would be 2.1Moz. At a reserve grade of 1.1gpt, this would represent a tonneage of 60Mt.

The following table summarises a ‘what if’ scenario:

It should be stressed that this is educated guesswork and should not be used in formulating a

valuation for KSN, but it does suggest that with a 2Moz reserve, and modest grade streaming early in

the mine’s life, a 170-180kozpa project at around US$800/oz could be targeted for a +10 year life.

So, this is a target worth testing.

Note in the above example, we have assumed that in the early years that higher grade ore would be

streamed to the mill.

It is far too early to speculate the capex required for a project of this scale.

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Other assets held by Kingston

Livingstone Gold project

The Livingstone Gold Project (75%) is an advanced exploration project with an existing JORC2004

Inferred mineral resource of 49,900 ounces and a number of high-grade drilling intersections that

indicate excellent potential for additional discoveries.

Located 140km northwest of Meekatharra in the Peak Hill mineral field of Western Australia,

Livingstone covers 204km2 of the western Bryah Basin.

Recent drilling has generated encouraging results including 7m at 12.6gpt and 18m at 3gpt. Recent

auger sampling has identified a large (4x5km) area of gold anomalism worthy of further drill testing.

The project is within trucking distance of other deposits within the Bryah Basin.

Lithium projects

KSN was recapitalised in 2016 as a lithium play. The company’s lithium assets include:

• Bynoe/Wingate Projects: Both projects are within the 180km long Litchfield Pegmatite Belt,

which lies close to Darwin. This is probably the most interesting of KSN’s lithium plays as it

adjoins the Bynoe and Finnis lithium projects of Core Exploration (CXO AU, not covered). The

Core tenements were bought in November 2017 from Liontown Resources for $1.5m and

approx. $2.7m in CXO shares. KSN’s Lei deposit, located adjacent to Core’s tenements, has

already yielded encouraging drill results, including one intercept of 12m at 1.43% Li2O.

• North Arunta Projects: Kingston holds a number of tenements within the Alcoota Pegmatite

Region and the Barrow Creek Pegmatite Field within the Arunta Region.

• Mt Cattlin Project: Within the project area, the Deep Purple South Prospect lies 14km south-

west of the established Mt Cattlin lithium mine (GXY) and 15km from the town of

Ravensthorpe, providing an ideal infrastructure setting.

• Greenbushes Project: The Greenbushes tenement adjoins the southern border of Talison’s

Greenbushes mine, the largest hard rock lithium mine in the world. The site contains a series

of mineralised pegmatites which have intruded along the Donnybrook-Bridgetown shear

zone.

Should KSN deliver a successful project out of Misima, it would be realistic to imagine that the lithium

assets would be sold, or spun out into a separate vehicle.

What could Misima be worth to KSN?

Valuation of ounces gold in the ground is always one of the great imponderables as the implicit value

of ounces (ie NPV per ounce) will vary so much depending on the quality of those ounces.

Nonetheless it is appropriate to try and make an estimate as to what a company could be worth

when judges against its peers. For consistency, we have used much the same peer group reported by

KSN in recent presentation. Updating for current share prices (and resource additions) the median

EV per resource ounce for 22 small to mid cap pre development gold companies is A$44/resource

ounce. Excluding the pre-development companies (such as Dacian and Gascoyne) the median score

drops to A$38/oz.

Needless to say, the spread is wide. At the low end, we see Azumah, Nusantara and Geopacific in the

$10-20/resource ounce range. These hold projects which carry some baggage with the market. At

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the high end, again excluding financed projects, in construction, we see the market favourites like

West African Resources (at $96/oz), Echo (at $79/oz). Even OreCorp, despite its Tanzanian exposure,

is trading at $44/oz.

The following analysis is very much a ‘what if’ for Kingston. What if the market was to pay roughly

half the peer group average for KSN’s current resource, the stock could trade at 4cps. What if the

forthcoming drilling programme added 10% to resources and then valued these ounces in line with

its peers, we could expect a per share value of 7-9cps.

We see a realistic share price target range of 4 to 7cps over the medium term.

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Appendix 1

Misima resources statement, November 2017

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Disclosures

Dr Chris Baker, an authorised representative of Bridge Street Capital Pty Ltd (Bridge), itself an authorized representative of BR Securities Australia Pty Ltd, certifies that the advice in this report reflects his honest view of the company. He has 29 years investment experience in wholesale capital markets. He worked as a mining analyst for brokers BZW and UBS for 11 years and has a further 16 years experience as a mining analyst and portfolio manager with Colonial First State and Caledonia Investments. He now provides independent financial advice on a part time basis. He currently owns shares in Kingston Resources.