2011-03-16 - xcap - tanzaniteone - finalv4

This research in non-independent and is classified as a Marketing Communication under FSA

rules. As such it has not been prepared in accordance with legal requirements designed to

promote independence of investment research and it is not subject to the prohibition on

dealing ahead of the dissemination of investment research. Further important disclosures are

contained in the disclaimer at the end of this document.

We estimate that FY 2010 management guideline production of 2.2 million

carats of Tanzanite will result in a return to profit after tax of US$ 1.44

million. We expect this to be a catalyst for a re-rating of the company’s

valuation towards our GBP 0.50 price target. With a low Capex requirement

and a growing future cash pile, we believe TanzaniteOne is returning to a

prodigious cashflow profile with healthy dividend paying fire power.

Furthermore we expect the company’s valuation to improve following the

recent re-rating of comparable coloured gemstone miner Gemfields plc

(AIM:GEM).

Driving this return to profitability includes; Changes to the mining system, leading to

better resource management, combined with an 18% Y-o-Y improvement in

recovered grade to 59 carats per tonne (our valuation model assumes a long term

grade of 55 carats per tonne), resulting in reduction of production costs.

The recent recovery of a 12,100 rough carat Tanzanite, discovered at a newly

intersected high grade fold structure, is the third largest high quality Tanzanite

gemstone ever mined at the Merelani Mine and will add to the cash pile.

We anticipate the successful awarding of the requisite Environmental Approval Certificate

within the next month, securing a further extension to the 25-year Special Mining Licence

(“SML”). Tsavorite resource development at Lemshuku – Shamberai adds further value to

the future gem product range. An additional resource update is expected in Q2 of 2011.

Valuation: We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash

Flow model. Our production forecast front loads the major portion of the tonnage

against a number of different scenarios within the models first 12 years. At a base

case scenario we calculate a NPV of US$ 92.0 million at a 10% discount rate, which

translates to a share price target of GBP 0.50 per share and initiate coverage with a

BUY recommendation.

Table 1: Earnings Forecast

Merelani Units Dec 10 F Dec 11 F Dec 12 F

EPS GB pence 0.84 2.91 3.65

PE Ratio Ro. 11.90 3.44 2.74

Source: XCAP Securities PLC

16 March 2011

XCAP Securities UK Equity Research Mining

BUY Target Price 50p

Share Price 10p

TanzaniteOne is the world’s leading

producer of ethically mined Tanzanite

that is completely traceable from

mine-to-market via the company’s

dedicated minesite cutting and

polishing centre in Tanzania.

.............................................................

Ticker ............................................. TNZ

Shares (m) ................................. 115.64

M.Cap (GBPm) ............................ 11..42

Cash (US$ m)………………………………1.72

Life-of-Mine ............................ 20 Years

2004 SAMREC Resource .......................

Indicated ........ 0.95 Mt for 63 M carats

to .................... 1.26 Mt for 83 M carats

Source: TanzaniteOne Ltd

Source: FactSet

Analyst Austin McKelvie

+ 44 20 32 16 26 34

[email protected]

Sales

Tim Burge

+ 44 20 32 16 26 29

[email protected]

John Grant

+ 44 20 32 16 26 60

[email protected]

TanzaniteOne (AIM:TNZ) Deep Blue Wonder

16 March 2011 TanzaniteOne (AIM:TNZ)

XCAP Securities UK Equity Research 2

Executive Summary

TanzaniteOne Limited (“TanzaniteOne”) is a Bermudian registered holding

company listed on the AIM Market of the London Stock Exchange. The

company is the world’s leading producer of ethically mined Tanzanite, a rare

and precious blue–violet gemstone of the zoisite group of minerals.

TanzaniteOne operates the Merelani Mine where it holds both a Special

Mining Licence and prospecting licences. The Merelani Mine is the world’s

only known and finite source of Tanzanite, situated in the foothills of Mount

Kilimanjaro, within the Simanjiro district of North Eastern Tanzania.

Corporate Structure

TanzaniteOne Ltd Gemfields PLC 10% (AIM:TNZ) (AIM:GEM)

Largest Shareholder

100%

75%

TanzaniteOne Mining TsavoriteOne Mining

Merelani Mine

Lemshuku-Shamberai Tsavorite Project

Tanzanite Mine Tsavorite Project

Special Mining Licence 12x Prospecting Licences

Mine-to-Market 100 square kilometres

Polishing & Cutting Centre Potentially Largest Known Single Source

SAMREC Code JORC Code - 2004

Isoclinally Folded Orebody Alluvial Gravel Deposit Covers 50% of Project

63 to 83 million carats 1.4 to 3.5 million carats

Indicated: - 0.89 to 2.17 M bcm @ 1.6 cpt

Inferred: - 7.6 to 10.4 M bcm

Blue-Violet Zoisite Superb Flashing Green Gemstone

Brilliant Green Gemstone Grossular Garnet

Quality for Quality Market Price 2 to 4x Tanzanite

Source: TanzaniteOne Ltd, XCAP Securites PLC

Production of Tanzanite from the Merelani Mine is sourced via six shaft

systems. Tonnage is called from an orebody consisting of tight isoclinally

folded stacks containing calc silicate boudins, which have been further cross

folded and plunge at 45 degrees to a north west cross fold. Mineralisation of

Tanzanite has been precipitated as the result of retrograde metamorphism

during fluid migration. Tanzanite’s rarity is attributed to the Merelani Mine



being the single known source of supply, which is a limited and finite

resource.

The current resource statement for the Merelani Mine, presented within the

Competent Person’s (“CPR”) Report by Ddraig Mineral Developments Ltd for

the AIM listing in August 2004, was calculated in accordance with the

SAMREC guidelines for a diamond resources. The CPR outlined an Indicated

Resources of Tanzanite at between 0.95 million tonnes for 63 million carats

to 1.26 million tonnes for 83 million carats.

Table 2: Forecast Tanzanite Production

Merelani Units Dec 08 Dec 09 Dec 10 F Dec 11 F Dec 12 F

Processed Tonnes 42,318 38,154 37,288 36,250 37,500

Tanzanite MCPA 2.20 1.91 2.20 2.28 2.29

CAPEX US$ m 5.65 4.73 3.00 3.75 3.50

Sales US$ m 26.90 12.46 15.40 18.27 20.02

EBITDA US$ m -4.70 -1.16 4.00 8.03 11.73

PAT US$ m -8.36 -2.42 1.44 5.02 6.29

FCF US$ m -23.77 -2.60 4.83 8.95 10.00

EPS GB pence 0.84 2.91 3.65

PE Ratio Ro. 11.90 3.44 2.74

Source: TanzaniteOne Ltd, XCAP Securities PLC

We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash Flow

valuation model using a long term Tanzanite price of US$ 16.00 per carat. We

believe that this is a comparatively cautious price assumption given that the

price peaked before the global economic crisis at US$ 28.00 per carat in

2006. The price is expected to continue its recovery from TanzaniteOne’s

2010 financial year average of US$ 7.00 per carat following the recovery in

the price of polished diamonds.

We derive an NPV of US$ 92.0 million at a 10% discount rate which translates

to a share price target of GBP 0.50 and initiate coverage with a BUY

recommendation.

Table 3: Life of Mine - Processed Tonnes '000 – NPV GBP per Share at 10% Real

Life-of-Mine – Years 12 14 16 18 20

Processed Tonnes ‘000 367.8 416.8 455.8 501.8 514.3

NPV GBP 0.42 0.45 0.47 0.49 0.50




Tanzanite

The gemstone industry and its market have long accepted that there are four

stones which deserve the label ‘precious’: diamond, sapphire, emerald and

ruby. The list of those classed as ‘semi-precious’ is extensive and whose

classification is by no means a perfect, as there are many rare gems which

command high prices, in which a regular market cannot be developed.

Tanzanite, a blue-violet vanadium-bearing gemstone, is the exception. First

discovered in 1967 and named by jewellers Tiffany & Co. after its country of

origin Tanzania, where the only known deposit was discovered at Merelani,

in the foothills of Mount Kilimanjaro (5,895 metres).

Tanzanite is the crystal form of a complex mineral Zoisite

(Ca2Al3(SiO4)(Si2O7)O(OH)), and can be best described as a vanadium rich

hydrous calcium aluminium silicate.

Table 4: Crystallographic Properties

Heading Left Tanzanite Tsavorite Emerald Ruby Sapphire Diamond

Colour Blue-Purple Brilliant Green Green Red Blue Clear

Mineral Zoisite Grossular Garnet Beryl Corundum Corundum Carbon

Mohs Hardness Scale 6.5 7.0 - 7.5 7.5 - 8.0 9.0 9.0 10

Specific Gravity 3.10 – 3.38 3.60 - 3.68 2.76 4.0 3.95 – 4.03 3.52 +/- 0.01

Chemical Formula (Ca2Al3(SiO4)(Si2

O7)O(OH)) Ca3Al2Si3O12 (Be3Al2(SiO3)6) Al2O3:Cr Al2O3 C

Discovered 1967 1967 1868

Credit Campbell R. Bridges

Mine Merelani Lemshuko Kagem Mogok Valley Kimberley

Country Tanzania Tanzanite Zambia Myanmar South Africa

Source: XCAP Securities PLC, Wikipedia

Unusually, Tanzanite is trichroic, radiating colours blue, violet and burgundy,

from three individual crystallographic axes. A small proportion of surfaces are

naturally coloured but the bulk has to be heated to bring out its marketable

blue hue, a process which is permanent. The result is a couple valence

exchange reaction stated by Olivier (2006), as taking the form: -

Ti3+ + V4+ -> Ti4+ + V3+



Tanzanite Market

The market for gems is intrinsically tied to the fortunes of consumers and

their level of confidence. Sales within the luxury goods market are closely

correlated with GDP.

Recent strong demand, particularly at diamond sales sold at tender, has seen

a remarkable recovery in the price of rough diamonds which have increased

from their credit-crisis lows, to exceed the pre-recession peak levels of mid-

2008.

The driving force for this recovery owes itself in part to:

• The liquidation of De Beers’ stockpile in and around 2007;

• Severe production cuts at diamond mines during the global credit crisis;

• The world’s largest diamond mines are now past their peak;

• The re-stocking by retail markets within the Far East; and

• Renewed consumer confidence in the US.

The United States was formerly the largest consumer market for polished

stones absorbing almost 50% of global supply, and is now eclipsed by India

and China, with their aspirational consumers.

Figure 1: Diamond Prices to August 2010

Source: WWW International Diamond Consultants Ltd

The recovery in rough diamond prices during 2009 to 2010 has been marked.

We expect polished prices to follow this lead with the global economic

recovery. The price of Tanzanite, which is late cycle, is expected to follow the



recovery in the price of polished diamonds. We expect this recovery to be

durable and pronounced over the next three years. Typically polished

diamonds lead the price of Tanzanite by between 12 to 18 months and

shortages of supply, in particular of smaller stones, is to the benefit of the

price for Tanzanite.

Improving marketability in the verification process from mine-to-market

further adds to TanzaniteOne’s brand, as the most ethical of Tanzanite

producers within the Merelani licence blocks. The TanzaniteOne gem

material is fully traceable to market from its source at the Merelani Mine in

Tanzania.



Tanzanite Foundation

The Tanzanite Foundation was established in an attempt to channel and

market all sources of Tanzanite through a single conduit.

TanzaniteOne, through the promotion of the Tanzanite Foundation, is the

world’s sole producer of ethically mined Tanzanite. The gems, which can be

traced from mine to market, are marketed through TanzaniteOne’s Tanzanite

Foundation.

The Tanzanite Foundation acts as a platform which encourages other mining

groups working within the Merelani District, including artisanal miners, to sell

their product through the Foundation. This maintains stability in a delicately

balanced market, safeguarding both price for the winner of the mineral and

giving reassurance of quality to the consumer. At the same time the

important ethical route guarantee restores confidence to the market via

traceability from mine to market via the company’s dedicated cutting and

polishing centre in Tanzania.

Table 5: Tanzanite Quality Scale

Grade Description

A Exceptional Colour, Eye Clean

B Rare Deep Colour, Eye Clean

B (SI) B Colour - Slightly Included

B (I) B Colour – Included

BL Lighter Colour B Grade, Eye Clean

BL (SI) B Light - Slightly Included

BL (I) B Light – Included

D Opaque Material


The Tanzanite Quality Scale™ (“TQS”) was introduced by TanzaniteOne as the

benchmark grading tool by which international gemmological laboratories

grade Tanzanite.



Mining Legislation

Mining in Tanzania falls under the legislation of The Mining Act, 2010 (“The

Act”). The Act, which came into assent in May 2010, and which re-enacts and

updates the preceding Mining Act of 1998, was promulgated with the

principle of maintaining a strong privately led mining sector.

At the same time the Tanzanian Government (“Government”) recognised and

made clear that it wished to address disparities identified specific to the

mining sector, including:

1) The low level of integration between the mining industry with other

sectors of the economy;

2) The modest contribution to GDP compared to the growth within the

mining sector; and

3) The capacity of the Tanzanian Government to effectively regulate

and administer the sector.

Through The Act, the Government aims to bestow and concentrate a greater

proportion of the benefits from mining on Tanzanian nationals.

Pertinent to TanzaniteOne, and applicants of the Government’s Special

Mining Licence, is the obligation to submit detailed proposals for the training

of Tanzanian citizens, and implement succession plans.

TanzaniteOne has endorsed this statute, in both the spirit and the letter of

the law, through the commissioning of a dedicated cutting and polishing

works. By realising as much of the mine-to-market benefit from Tanzanite

production within Tanzania, TanzaniteOne now makes a major contribution

to the development of the Tanzanian lapidary industry.

The company goes further to honour its responsibility to realise beneficiation

within Tanzania through the Tanzanite Foundation.

In this manner the Government utilises the legislation to create employment

opportunities, and to further rebalance Tanzania’s disproportionately weak

manufacturing base relative to the growing extractive industry.



Under The Act, mineral rights may be granted to mining companies under

which they may explore for and extract minerals in accordance with the

following licences:

Table 6: The Mining Act, 2010, Mineral Rights & Mining Licences

Licence Validity Renewal Capital Obligations Conditions

Years Extension Investment

Years US$ m

Prospecting Licence 4 3, then 2 n/a Feasibility Study

50% of area

relinquished upon

each licence

renewal

Gemstone Prospecting Licence 4 n/a n/a n/a

Retention Licence 5 n/a

Independent

Assessment by

Consultant

n/a

Primary Mining Licence 7 0.1 n/a n/a

Special Mining Licence Life-of-Mine Yes 100

Resource

Statement,

Feasibility Study

Environmental

Management Plan

Source: Government of Tanzania, The Mining Act, 2010

The most significant changes to the legislation are the drive to increase the

end benefit to Tanzania with regards to creating employment and developing

a manufacturing base within the country.

Important to TanzaniteOne are the changes in the royalty rate for both gems

and gemstones. The legislation has provided relief with a 67% reduction in

the royalty for the export of cut and polished gems to 1.0% from 3.0%. At the

same time, the Act imposes a 67% increase in the royalty rate to 5% for uncut

gemstones from the previous rate of 3%.

An additional section within The Act requires holders of a Special Mining

Licence to make available a listing on the Stock Exchange in Dar es Salaam,

such that shares may be bought and sold to Tanzanian nationals.



Additionally changes to mining royalties have resulted in both a 67% and 33%

increase in the royalty paid by uranium and gold miners respectively. The Act

also rewards gem miners by encouraging greater beneficiation within the

country with a 67% reduction in the royalty paid at the expense of exporters

of rough gemstones.

Table 7: Royalty Changes and Their Effect within The Mining Act, 2010

Mineral Royalty Royalty Royalty

2010 1998 Increase

Uranium 5% 3% 67%

Gemstones 5% 3% 67%

Diamonds 5% 5% 0%

Precious Metals 4% 3% 33%

Platinum Group 4% 3% 33%

Base Metals 4% 3% 33%

Gem 1% 3% -67%

Industrial

Minerals 3% 3% 0%

Source: Government of Tanzania, XCAP Securities PLC

With the commissioning of the cutting and polishing works, TanzaniteOne

fulfils its obligation with respect to The Act and we are confident that the

Special Mining Licence will be extended for a further 25 years.

We believe that as Tanzania grows in stature as a mining destination, it is

only through taking greater control over its mineral wealth that the

Tanzanian Government can avoid the unfortunate social and political unrest

now seen in such countries as South Africa and Zimbabwe.



Merelani Mine

The Merelani Mine is situated within one of 5 licence blocks within the

world’s only known source of Tanzanite over an approximate 7km by 1km

footprint near the foothills of Mount Kilimanjaro in Tanzania.

The mine which is serviced by six shafts is powered by a 2 MW line

connection to the National Grid. This power source which is maintained by

the Tanzanian Electricity Supply Company is backed up with diesel powered

generators for purposes of contingency.

With a design capacity to deliver over 1.2 megawatts to maintain continuous

mining operations, this capacity is significantly more than that required by

TanzaniteOne's entire mining and processing operations.

Tonnage from the mine is currently called from the Main Shaft where a 3.5

tonne skip draws production from infrastructure where development has

extended to 800 metres below surface.

Holed through and connecting the Main Shaft are both the Bravo and CT

Shafts, where underground development has increased the reserve base to

three years ahead of production.

Figure 2: Tanzanite Ore Zone – Fold Model


The Merelani Tanzanite orebody consists of tight isoclinally folded stacks,

containing calcsilicate boudins, which have been further cross folded and



plunge at 45 degrees to the NW, with mineralisation of Tanzanite having

been precipitated as the result of retrograde metamorphism during fluid

migration.

Figure 3: Tanzanite Ore Zone – Fold Model


TanzaniteOne have introduced a system of optical sorters within their plant

to enable improvements in their on-mine security resulting in higher margins

from Premium A and B Grades, and on branded polished Tanzanite.

At the time of the AIM Market listing in 2004, the Merelani Mine had a

resource calculated in accordance with the SAMREC guidelines, at between

0.95 million tonnes for 63 million carats to 1.26 million tonnes for 83 million

carats within the Indicated category.

Table 8: SAMREC 2004 Resource Estimate

Category Tonnage Carats

Indicated 0.95 63.0

1.26 83.0

Source: Ddraig Mineral Developments Limited



Tsavorite

In March 2009, TanzaniteOne acquired the Lemshuku–Shamberai Tsavorite

Project (“Tsavorite Project”), located approximately 20km southwest of

TanzaniteOne’s existing Tanzanite operations.

The acquisition of the Tsavorite Project from both from Green Hill Mining Ltd

and Kirkwood Resources Ltd was made for an aggregate consideration of

7,450,000 TanzaniteOne shares and US$ 350,000 in cash. It comprises 12

prospecting licenses over a 100 square kilometre area.

Tsavorite, an intense green variety of grossular garnet, also known as

Tsavolite, was first discovered at Lemshuko in 1967 by a South African gem

prospector and geologist, the late Campbell R. Bridges. Tsavorite, a calcium-

aluminium garnet with the formula Ca3Al2Si3O12, owes its intense colour to

trace amounts of both vanadium and chromium and unlike emeralds is highly

transparent.

Bridges, believing that the deposit was part of a larger geological structure

possibly extended into Kenya, was rewarded with a subsequent exploration

discovery in 1971 and was granted a mining permit to work his deposit.

In 1974 Tiffany & Co launched a marketing campaign which brought broader

recognition of the stone giving it its current name after Tsavo National Park in

Kenya.

TanzaniteOne through their subsidiary TsavoriteOne Mining, are developing

the Lemshuku–Shamberai Tsavorite project through resource estimation

having placed the project on hold during the global financial crisis of 2008.



Tsavorite Resource Estimate

Exploration work conducted during late 2009 and 2010 culminated in January

2011 with the release of a maiden JORC Compliant Resource Statement over

approximately 50% of the Tsavorite Project.

This resource study evaluated results from a total of 164 drill holes to an

average depth of 19 metres for a total depth of 3,180 metres. The drilling,

which comprised 6 inch rotary air blast (“RAB”) and down hole hammer

drilling, was used to determine both the volume of gravels, with 2,100 heavy

bulk mineral sampling to determine the in-situ grade at a 1.5 metre intervals.

Between an estimated 7.6 to 10.4 million bank cubic metres (“bcm”) or

approximately 18.2 to 24.9 million tonnes was delineated within the Inferred

Resource Category. In conjunction with this is an associated Indicated

Resource of between 0.89 to 2.17 million bcm, or approximately 2.1 to 5.2

million tonnes enclosed within the Inferred resource.

An average in-situ grade of 1.6 carats per loose cubic metre (“lcm”) was

defined for the Indicated Resource, with an estimated 1.4 and 3.5 million

carats of Tsavorite. The additional resource statement is expected in the

second quarter of 2011.

Table 9: Tsavorite Project - JORC Compliant Resource Summary

Resource Resource Gravel Type Waste Resource Average Grade Carats

Category Block bcm million carats per lcm millions

Indicated Lines C to F Terrace 50% 0.34 1.6 0.55

Gravels 80% 0.14 0.22

Indicated Lines C to F Channel 50% 1.83 1.6 2.93

Gravels 80% 0.75 1.2

Inferred Lines C to J Channel and

Terrace 7.6 to 10.4

Total Inferred Resource 7.6 to 10.4




Valuation

We present our valuation analysis for TanzaniteOne’s Merelani Mine based

upon an intuitive 20 year Life-of-Mine Discounted Free Cash Flow model.

We use a 20 year Life-of-Mine forecast based upon the strength of the

historical production profile, gaining comfort from the following mining and

geological factors:

1) The Merelani Mine now has a significant level of mining flexibility,

attributable to sub-surface development since the publication of the

maiden SAMREC Compliant Resource Estimate of 2004;

2) Underground sampling, undertaken along the hinge axes of the

plunges, has contributed to a greater understanding of the geological

model and the mineralisation within the Jaluawatu Zone;

3) There exists a greater overall understanding of the structural controls

on mineralisation with respect to the boudinage; and

4) A change in the mining system has enabled better mine planning -

the current reserve to production base exceeds 3 years, easing grade

prediction, and thus improving the Mine Call Factor over the Life-of-

Mine.

Notwithstanding these determinants, our appraisal takes account of the

unique nature of the Merelani Mine ore body. Specifically, the deceptively

difficult task of calculating a continuous, compliant resource estimate on an

annual basis for a mineral which can neither by assayed, nor accurately

calculated with ease and whose capacity is measured solely by direct

recovery from mining operations.

Our analysis looks specifically at this conundrum by focusing methodically on

a range of scenarios. We consider the cyclical nature of the market for

Tanzanite, which is invariably tied to consumer confidence and discretionary

spending, and the marketing of an end product, which has no industrial use

and no formal market, as well as the accepted variables which affect the

valuation of mining companies including:

1) Life-of-Mine Tonnage – modelled over 12, 14, 16, 18 and 20 Years;

2) Tanzanite Grade – carats per tonne;

3) Product Split - % of High Quality A, B Grade relative to ROM Quality;

4) Tanzanite Price Received – High Quality A, B Grade Product;

5) Tanzanite Price Received – Run-of-Mine Product; and

6) Mining Unit Costs – US$/tonne.



Life-of-Mine Tonnage

We present our Life-of-Mine processed tonnage scenarios over a range of

years from between 12, 14, 16, 18 and 20 years, detailing the corresponding

processed Life-of-Mine NPV Valuation per share at a 10% discount rate and

price per share.

Table 10: Life-of-Mine Tonnage

Life-of- Production Life-of- Production Production NPV GBP

Mine Years 1–10 Mine Years 1-10 Peak 2015 10% Real

Years Tonnage Tonnage % Tonnage US$ M per Share

12 344,750 367,750 94% 40,000 78 0.42

14 353,750 416,750 85% 40,000 84 0.45

16 353,750 455,750 78% 40,000 88 0.47

18 353,750 501,750 71% 40,000 91 0.49

20 353,750 514,250 69% 40,000 92 0.50


Our forecast envisages an increase in the tonnage processed to a peak rate of

40,000 tonnes per annum (“tpa”) in 2015, from our 2010 estimated

throughput of 37,000 tpa. We maintain Tanzanite production at a plateau

Figure 4: TanzaniteOne, Life-of-Mine - Tonnage Production Profile


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

12 Years 14 Years 16 Years 18 Years 20 Years



rate of slightly over 2.0 million carats per annum (“cpa”) for a five year

period, and importantly for investors, front load the tonnage within the first

ten years then model a decline in production over the respective Life-of-Mine

scenarios as detailed in the graphic.

Table 1: Life of Mine - Processed Tonnes '000

Real NPV US$ million Real NPV GBP per Share

Discount 367.8 416.8 455.8 501.8 514.3 Discount 367.8 416.8 455.8 501.8 514.3

0.0% 149 173 190 208 211 0.0% 0.80 0.93 1.02 1.13 1.14

2.0% 129 148 160 174 175 2.0% 0.70 0.80 0.87 0.94 0.95

4.0% 113 127 136 146 147 4.0% 0.61 0.69 0.74 0.79 0.80

6.0% 100 110 117 124 125 6.0% 0.54 0.60 0.63 0.67 0.68

8.0% 88 96 101 106 107 8.0% 0.48 0.52 0.54 0.57 0.58

10.0% 78 84 88 91 92 10.0% 0.42 0.45 0.47 0.49 0.50


At a lower case scenario, using a 12 year Life-of-Mine, we calculate an NPV of

US$ 78.0 million. This figure escalates to an NPV of US$ 92.0 million for a

corresponding 20 year Life-of-Mine at a 10% discount rate for a total

processed tonnage of 514,250 tonnes, which translates to a GBP 0.50 per

share.

Tanzanite Grade

Our analysis extends further to determine the sensitivity of the NPV to the

grade presented to the plant. We select an average Tanzanite grade of 55

carats per tonne, which we consider represents a fair blend from production

over the Life-of-Mine. We run a sensitivity analysis at intervals of +/- 5 and 10

carats per tonne either side of this variable.

Table 2: Tanzanite Grade – carats per tonne


Discount 45 50 55 60 65 Discount 45 50 55 60 65

0.0% 159 185 211 236 262 0.0% 0.86 1.00 1.14 1.28 1.42

2.0% 132 154 175 197 219 2.0% 0.71 0.83 0.95 1.06 1.18

4.0% 111 129 147 166 184 4.0% 0.60 0.70 0.80 0.90 0.99

6.0% 93 109 125 141 156 6.0% 0.50 0.59 0.68 0.76 0.85

8.0% 79 93 107 120 134 8.0% 0.43 0.50 0.58 0.65 0.72

10.0% 68 80 92 104 116 10.0% 0.37 0.43 0.50 0.56 0.63




At our base case scenario of 55 carats per tonne and a 20 year Life-of-Mine,

our modelled grade gives an NPV of US$ 92 million or GBP 0.50 per share.

This production metric advances to an NPV of US$ 104 million and US$ 116

million at grade increases of 60 and 65 carats per tonne respectively. These

NPVs equate to GBP 0.56 and GBP 0.63 per share, thus illustrating the benefit

to the NPV of potential productivity improvements.

Figure 5: Improvement In Mine Call Factor Improves Grade


We consider this to be a likely scenario and would justify a higher valuation

than our core GBP 0.50 target, as highlighted by the NPV table. More recently

TanzaniteOne has encountered a potential high-grade zone within the

intersecting fold structure, where a 12,100 carat rough Tanzanite, (2.42 kg)

was recovered.

This was the third largest Tanzanite gemstone to have been mined from the

Merelani Mine, and will undoubtedly contain significant quantities of the

highly desirable, high-end Grade A quality Tanzanite.

40

50

60

70

80

90

0

5

10

15

20

25

Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 F Jun 12 F

cara

ts p

er

ton

ne

Pro

cess

ed

To

nn

es

-'0

00

Interim Reporting Period - Processed Tonnes '000s

Plant Feed Tanzanite Grade



Product Split - % of High Quality A, B Grade Product

We investigate the effect of the percentage contribution of the High Quality

A and B Grade Tanzanite products relative to the Run-of-Mine production to

the NPV and note the lower degree of sensitivity.

Table 11: Product Split - % of High Quality A, B Grade Product relative to Run-of-Mine Product Quality


Discount 0% 5% 10% 15% 20% Discount 0% 5% 10% 15% 20%

0.0% 211 217 224 231 238 0.0% 1.14 1.17 1.21 1.25 1.28

2.0% 175 181 187 194 200 2.0% 0.95 0.98 1.01 1.05 1.08

4.0% 147 153 158 164 169 4.0% 0.80 0.83 0.86 0.88 0.91

6.0% 125 130 135 140 145 6.0% 0.68 0.70 0.73 0.76 0.78

8.0% 107 111 116 120 125 8.0% 0.58 0.60 0.63 0.65 0.67

10.0% 92 96 100 104 108 10.0% 0.50 0.52 0.54 0.56 0.59


We believe that with the introduction of optical sorting systems,

TanzaniteOne can realise improvements in product quality resulting in higher

margins from Premium A and B Grades, and on branded polished Tanzanite.

Our core GBP 0.50 target price assumes nothing for these A and B high end

products. Therefore the upside to this metric remains open.

Tanzanite Price Received – High Quality

Extending this we look at the impact of a 20% inclusion of the A and B

product relative to the Run-of-Mine production, at varying prices from US$

20 per carat up to US$ 40 per carat, and their respective contribution to the

NPV.

Table 4: Tanzanite Price Received – 20% High Quality – US$/carat



0.0% 238 259 279 300 321 0.0% 1.28 1.40 1.51 1.62 1.74

2.0% 200 217 235 253 271 2.0% 1.08 1.18 1.27 1.37 1.47

4.0% 169 185 200 216 232 4.0% 0.91 1.00 1.08 1.17 1.25

6.0% 145 158 172 186 199 6.0% 0.78 0.86 0.93 1.00 1.08

8.0% 125 137 149 161 173 8.0% 0.67 0.74 0.81 0.87 0.94

10.0% 108 119 130 141 152 10.0% 0.59 0.64 0.70 0.76 0.82




At the base case scenario, a 20% inclusion of A and B Grade product at a

Tanzanite price of US$ 20 per carat, we calculate an NPV of US$ 108 million,

which escalates by 41% to US$ 152 million, or between GBP 0.59 and GBP

0.82 per share, demonstrating the improvement to the NPV of an upturn in

the retail prices.

Miner Gemfields PLC (AIM:GEM) interim results for period to December 2010

report a 414% increase in average price per carat sales to US$ 26.20 per carat

at their December auction, from US$ 5.10 per carat received at the

November 2009 site, both of which were held in Johannesburg, South Africa.

More importantly the percentage of Gemfields lots sold by value rose to 99%

from 76% all for Higher Quality carats.

Tanzanite Price Received – Run-of-Mine Quality

Next we test the gearing of the run-of-mine product to the price of

Tanzanite. We increase our base case Tanzanite price of US$ 7.00 per carat

through the economic cycle to reflect the recovery in the luxury goods

market, through US$ 8.00 per carat in 2011, and a long term average life-of-

mine flat forecast price received of US$ 16.00 per carat.

Figure 6: Historic & Forecast Tanzanite Price


0.00

5.00

10.00

15.00

20.00

25.00

30.00

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Tanzanite price US$ per carat



This rate of change in this estimate is again tested +/- 5% and 10% either side

of this forecast.

For a 10% increase in our long-term Tanzanite price received of US$ 16.00

per carat to US$ 17.60 our NPV experiences a 14% uplift in the share price to

GBP 0.57 from GBP 0.50.

Table 5: Tanzanite Price Received - Low


Discount 14.40 15.20 16.00 16.80 17.60 Discount 14.40 15.20 16.00 16.80 17.60

0.0% 182 196 211 225 239 0.0% 0.98 1.06 1.14 1.21 1.29

2.0% 152 164 175 187 199 2.0% 0.82 0.88 0.95 1.01 1.08

4.0% 127 137 147 158 168 4.0% 0.69 0.74 0.80 0.85 0.91

6.0% 107 116 125 134 142 6.0% 0.58 0.63 0.68 0.72 0.77

8.0% 91 99 107 114 122 8.0% 0.49 0.54 0.58 0.62 0.66

10.0% 78 85 92 99 105 10.0% 0.42 0.46 0.50 0.53 0.57


Mining Unit Costs

Finally we consider the unit cost of mining on a US$ per tonne metric basis as

being independent of the Tanzanite grade and a measure of efficiency of

mining rather than the benchmark US$ per carat.

We show that for a 25% reduction in operating costs to US$ 150 per tonne

the share price increases by 9% to GBP 0.51 from GBP 0.47, giving insight to

the rationalisation experienced over the past year with regards to both head

office and on-mine costs.

Table 12: On Mine Unit Costs – US$/tonne



0.0% 214 206 197 186 174 0.0% 1.15 1.11 1.06 1.01 0.94

2.0% 178 172 164 155 144 2.0% 0.96 0.93 0.89 0.84 0.78

4.0% 150 145 138 130 120 4.0% 0.81 0.78 0.75 0.70 0.65

6.0% 128 123 117 110 101 6.0% 0.69 0.67 0.63 0.59 0.55

8.0% 110 106 100 94 86 8.0% 0.59 0.57 0.54 0.51 0.46

10.0% 95 91 87 81 73 10.0% 0.51 0.49 0.47 0.44 0.40




Recommendation

The price of Tanzanite has seen a recovery from its credit-crisis lows of 2008.

On a relative basis the gem lags diamond prices by approximately a year to

eighteen months and has started to show new life along with recovery in

consumer confidence from the nadir of the past three years.

TanzaniteOne’s current market capitalisation of US$ 18.4 million (GBP 11.4

million) sits at 39% discount to the current book value of its fixed assets of

US$ 30.1 million.

With the historical share overhang removed, no debt and a reserve-to-

production base of 3 years, we believe that the stock is grossly undervalued.

TanzaniteOne’s main peer Gemfields (AIM:GEM) is currently being re-rated,

having also returned to profit following recovery from the global economic

crisis. We expect TanzaniteOne to follow a similar market re-rating.

We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash Flow

valuation model. Using a long-term Tanzanite price of US$ 16 per carat we

derive a NPV of US$ 92.0 million, which translates to a share price target of

GBP 0.50, and initiate coverage with a BUY recommendation.

Table 13: Shareholding

%

Directors 17.0

BlackRock Investment Management 4.1




Glossary

Boudinage A structural geological feature formed under

flexural tension, where a competent tabular

body is extended and deformed amidst less

competent surroundings.

Bank Cubic Metres Bank Cubic Metres (“BCM”) is a traditional unit

of volume in mining. A bank cubic metre

represents the contents of a cubic metre of rock

in place, before it is drilled and blasted.

Feasibility Study A study, including final engineering, to

determine the economic viability of a project.

Free Carried Interest The interest derived from holding shares of

which the holder enjoys all the rights of a

shareholder but has no obligation to subscribe

or contribute equity capital for the shares.

Gem Cut and polished or engraved gemstone.

Gemstones Rough or uncut stone, including diamonds and

emeralds and tanzanite along with others

prescribed within The Mining Act, 2010.

JORC The Australasian Institute of Mining and

Metallurgy’s Joint Ore Reserves Committee

mineral resource classification system.

Jaluawatu Zone The Jaluawatu Zone is the main tanzanite-

bearing ore-zone named after Ali Jaluawatu, a

Tanzanian farmer who started large scale

mining within Block C.

Loose Cubic Metres The gross quantity from mining, the aggregate

of Bank Cubic Metres plus and allowance for

bulking.

Mining Development

Agreement

An agreement made between the Government

and the holder of a mineral right with intention

to conduct mining operations under a Special

Mining Licence.

Mining Licence A mining licence for a medium scale mining

operation, whose capital investment is between

US$ 100,000 and US$ 100,000,000 or its

equivalent in Tanzanian shillings.

On-Mine Cash Costs On-mine cash costs include mine operating

costs, mine administration costs and royalty

charges incurred at Merelani Mine.

Primary Mining Licence A licence for small scale mining operations,

whose capital investment is less than

US$100,000 or its equivalent in Tanzanian



shillings.

Qualified Person The competent person, who in addition to

signing off a resource statement, also consents

to being named as the qualified person within

the resource statement.

Reserve-to-Production A ratio reflecting the rate of underground

development to depleting reserve base. A

multiple of less than 1.0 x suggests a critical fall

in the rate of development may highlight

problems with sub-surface congestion and face

availability.

Rotary Air Blast Rotary Air Blast (“RAB”) is an inexpensive

exploration technique frequently used to obtain

rock chip or gravel samples at shallow depth.

Compressed air is directed down the inside of a

percussive drill, with the released sample

returning via the outside pipe casing.

SAMREC The South African Code for Reporting of

Exploration Results, Mineral Resources and

Mineral Reserves, prepared by the South

African Mineral Resource Committee under the

auspices of the South African Institute of Mining

and Metallurgy and the Geological Society of

South Africa.

Special Mining Licence A licence awarded under the Tanzanian Mining

Act 2010 for large scale mining operation,

whose capital investment is not less than

US$100,000,000 or its equivalent in Tanzanian

shillings.

Tanzanite Zoisite Ca2Al3(SiO4)(Si2O7)O(OH)

Tanzanite Foundation A non-profit industry supported organisation

which strives to deliver value for stakeholders,

whilst upholding the ethical route to market.

Trichroism A property, peculiar to certain crystals, of

transmitting light of three different colours

when viewed from three different directions.

Tsavorite Grossular Garnet Ca3Al2Si3O12

Unit Costs A measure of mining efficiency independent of

the concentration of mineral within the

material moved.



Abbreviations

bcm Bank cubic metres

ct Carat

CPR Competent Person’s Report

cpt Carat per tonne

DMD Ddraig Mineral Developments Limited

DMS Dense Media Separation

EIA Environmental Impact Assessment

GDP Gross Domestic Product

JORC Joint Ore Reserves Committee

JWZ Jaluawatu Zone

lcm Loose cubic metres

L-of-M Life-of-Mine

MML Merelani Mining Limited

MT Million tonnes

TPA Tonnes per annum

MCPA Million carats per annum

RAB Rotary Air Blast

SAMREC The South African Mineral Resource Committee

SML Special Mining Licence

The Act The Mining Act, 2010



Weights and Measurements

1 Carat = 200 milli grams

1 tonne = 1 metric tonne = 1000 kg = 2204.6 pounds



References

Merelani Mine, Competent Person’s Report, 2004

Ddraig Mineral Developments Limited, Llandudno, Conway, Wales

In: Tanzanite One Limited, AIM Rule 26, Admission Document, 2004

Olivier, B., 2006, The Geology and Petrology of the Merelani Tanzanite

Deposit, NE Tanzania, Unpublished Ph.D. Thesis 2006

Universiteit van Stellenbosch, Stellenbosch, Suid Afrika

The United Republic of Tanzania, 2010, The Mining Act, 2010

Government of the United Republic of Tanzania, Dodoma, Tanzania

Storrar, C.D., 1987, South African Mine Valuation, Revised 3rd Edition

Chamber of Mines of South Africa, Johannesburg, South Africa

Broker Yes

Market Maker Yes

Note seen by company Yes

Factual changes No



Disclosures

This research is non-independent and is classified as a Marketing Communication

under FSA rules. As such it has not been prepared in accordance with legal

requirements designed to promote independence of investment research and it is

not subject to the prohibition on dealing ahead of the dissemination of investment

research.

Meanings of XCAP Recommendations Analyst

Buy

Expected to outperform the FTSE All Share by

15% or more over the next 12 months.

The research analyst attests that the views expressed in this

research report accurately reflect his personal views about the

subject security and issuer. Furthermore, no part of his

compensation was, related to the specific recommendation or

views expressed in this research report.

Outperform

Expected to outperform the FTSE All Share by

5/15% over the next 12 months.

Market Perform

Expected to perform in line with the FTSE All

Share over the next 12 months.

Underperform

Expected to underperform the FTSE All Share

by 5/15% or more over the next 12 months.

Sell

Expected to underperform the FTSE All Share

by 15% or more over the next 12 months

Speculative Buy

The stock has considerable level of upside but

there is a higher than average degree of risk.

XCAP Securities plc acts as broker to this company. XCAP Securities plc may have

acted as manager in the underwriting or placement of securities and/or may have

received compensation for investment banking for this company within the last 12

months.

XCAP Securities plc is a Market Maker to this company.

As a new company XCAP Securities plc will produce a table of its Research

Recommendations for the relevant quarter when it has established a material

record.



Disclaimer

This Research is intended only for investors who are Professional Clients or Eligible

Counterparties as defined by FSA, and is therefore not to be distributed to other

classes of investors.

Whilst this Research is not subject to the prohibition on dealing ahead of the

dissemination of investment research, XCAP Securities plc (XCAP) has adopted

internal procedures which prohibit analysts and other relevant persons from dealing

ahead of non-independent research, except for legitimate market making and

fulfilling clients’ unsolicited orders as part of its Conflicts of Interest Policy. XCAP

Conflicts of Interest Policy is available at www.xcapgroup.com

This document is provided solely for your information and does not constitute an

offer or solicitation to buy or sell securities or instruments of any kind. This

document is produced in accordance with UK laws and regulations and is not

intended for any person whose nationality or residential circumstances may render

its receipt unlawful.

The information contained in this document has been obtained from sources which

XCAP believes to be reliable. The Company does not warrant that such information is

accurate or complete. All estimates and prospective figures quoted in this report are

forecasts and not guaranteed. Opinions included in this report reflect the Company’s

judgement at the date of publication and are subject to change without notice.

2011-03-16 - xcap - tanzaniteone - finalv4

Documents