Victoria Gold — Update 20 September 2016

Victoria Gold decided to push forward with a plan to update its flagship Eagle Gold Project, its economics and scope, while the mining sector languished post the gold price crash of April 2013. To achieve this, the company maintained a healthy treasury through diligent cost-savings at the corporate level, as well as utilising the Canadian flow-through market for additional small capital raisings. Having now drilled out areas prospective for further gold resources along the Potato Hills Trend, notably at the Olive and Shamrock Zones, VIT has also delivered on its previous statements that it would bolster Eagle’s mine life through mining higher-grade satellite deposits (namely Olive). While metallurgical recovery rates and some costs have not reduced, overall Eagle has come through the FS revision significantly more robust.

With a gold price reflecting prevalent US low interest rates and geopolitical risk, which has helped revive VIT’s share price (now higher than any time since 2011), Eagle is as well positioned and de-risked for development as it has ever been. The following sections are based on VIT’s 12 September 2016 summary of the Eagle Project’s revised and updated feasibly study and our fully diluted valuation.

Critical to the updated feasibility study has been a recalculation of Eagle’s mineral resources and ore reserves (both are NI43-101 compliant, a prerequisite for completion of a feasibility study). VIT has also included, for the first time, a maiden resource and reserve estimate for the satellite Olive deposit, which positively affects Eagle’s mined grades in the first four years of the future mine’s life.

Although in the 2016 FS VIT has increased its ore reserves by a material 34% over the estimate used to form the 2012 FS mine schedule (see Exhibit 1), this has extended Eagle’s mine life by one year. The important aspect of a maiden Olive ore reserve is that it raises the gold grade and demonstrates future ore reserves in close proximity to mine infrastructure.

A major change to the 2012 FS is the estimation of a maiden resource and ore reserve for the Olive satellite deposit, located 2.5km from the proposed Eagle mine site. This maiden Olive reserve estimate has been included in the Eagle mine plan. The higher-grade Olive ore reserve (probable and proven categories) of 0.95g/t Au is 30% above that of the equivalent Eagle grade of 0.73g/t for crushed Eagle ore or 0.66g/tg/t in Eagle run-of-mine ore is included.

While the maiden Olive reserve estimates a small 200koz of recoverable gold (ie approximately one full year’s production), this represents justv30% of the Olive resource being converted to reserve, a low conversion that has resulted from a first round of drilling being conducted over the deposit. We would expect VIT to convert further portions of the Olive resource to reserve by undertaking further drill campaigns.

VIT completed its previous Eagle feasibility study in April 2012, a year before the gold price crash of April 2013. As such, this previous study was based on a C$:US$ forex rate of 0.93, a long-term gold price of US$1,325/oz and its scope related only to the Eagle gold deposit. Capital estimates based in 2012 would also reflect higher equipment and construction costs associated with a tighter construction market for mine projects, not only in Canada, but also worldwide.

The small reduction in annual average gold production from 195koz previously to 190koz, or 3%, is evident in Exhibit 5 above. Recalculation of the leached grade averages, across life-of-mine (LOM), has resulted in a 14% drop, from 0.78g/t to 0.67g/t. It should be noted, however, that,the grade of crushed ore is 0.73g/t Au, while lower grade run-of-mine ore is opportunistically hauled to the heap leach pad instead of the waste dump, driving down the stripping ratio to less than one (ie one tonne of waste to one tonne of ore) . The overall reduction in the average estimated gold grade over LOM is due to lower grade material assaying 0.27g/t Au being included in the mine schedule. The average LOM gold grade is lower now than in the 2012 FS, this is due to:

Our base case valuation factors in the optimised 2016 Eagle FS and is adjusted for our in-house Au prices, as shown in Exhibit 6 below.

We assume VIT develops Eagle as per its 2016 updated FS, and as per our assumption for a FY19 (CY18) mine start-up. We understand that VIT’s management believes the project could be financed using a 70/30 debt/equity split, but that it would likely reduce the debt burden below this level. We therefore make the assumption that the project is financed using a 60/40 debt/equity structure. The total initial capital (C$370m) and working capital outlay (C$26m) for Eagle is C$396m, which we forecast as spent entirely over FY18 (CY17). At VIT’s 14 September 2016 share price of C$0.61, this could potentially result in the issue of 192m new shares to raise C$117m. We also assume C$5.9m of issue costs (ie 5%) related to an equity raise of this scale. This leaves a residual funding requirement of around C$190m, to be met as debt.

On this fully diluted basis, we estimate that the discounted stream of theoretical dividends in current money terms would be worth C$409m or C$1.01 per share. This uses a 10% discount rate to reflect general equity risk. A graph of these annual theoretical dividends per share, earnings and dividend discount flow (DDF) is given in the following exhibit.

Other than for the delineation of more gold resources and conversion of these to reserves, the quickest way for the company to increase Eagle’s value is by increasing the throughput at the crushing plant by 23%, from 30,100tpd to 37,000tpd. This additional ore would be leached to produce, on average, an additional c 20koz of gold pa over the 10-year mine life.

If this upside case is realised by the company, we consider that an additional 11 cents could be added to our base case valuation, for total of C$1.12 per share.

Additional upside could also be attributed to the following. However, we have not been able to quantify the effects of these on our base case and await further guidance from the company.

The following provides an assessment of both qualitative and quantitative risks thought relevant to VIT, as well as those specific to the Eagle project. The company’s main concern currently is to finance the project and initiate construction. To this end, management has stated that it is already having a number of conversations concerning financing, which it would ideally like to complete and finalise before end 2016. This would allow first construction activities to occur on site early in 2017 and allow a start to mining in 2018. This is currently our assumption for developing Eagle and the timeline to first gold production.

Demonstrating how leveraged to the gold price bulk tonnage ore bodies tend to be, a US$100/oz change in the gold price results in a an average 17% increase in our base case, or c 13 cents per share.

A 5% change in the discount rate applied to our base moves our valuation c 30%, or c 25 cents per share.

The following exhibit provides valuations at varying share prices. A 10 cent change in the share price used to raise 40% of the C$396m (initial capex of C$370m plus working capital of C$26m) capital required as equity results in a 8% change in our base case of c 7c.

Victoria Gold has issued 129 new shares since our last note published on 7 April 2016. These were issued for the following reasons:

With a total of C$55.7m raised ytd, VIT is well positioned to fund itself through to the eventual construction of Eagle. We forecast central costs of C$2.1m per annum, and include a small C$3.6m exploration budget to assist VIT with any final drilling or ancillary activities that may be required before mine construction starts proper.

We currently forecast VIT to finish FY17 with net cash of C$59.5m. The company is debt free.

The following exhibit provides a comparison of VIT’s Eagle Gold Project alongside three other cold-weather heap leach projects operated by Kinross and planned for development by Atacama Pacifics Cerro. The updated feasibility study has improved Eagle’s credentials as a sizeable cold-weather heap leach, with estimated cash costs and capital intensity the lowest in this comparison. The following exhibit also serves to demonstrate that the cold-weather environment of the Yukon during the winter months is not a critical constraint to development of these types of gold mining operation. The comments in the chart give further details on key attributes of Eagle compared to the other three cold-weather heap leach projects given.