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Battery Metals IndexFebruary 12, 2018

Battery Metals Stocks SurgeThe Ubika Battery Metals Index jumped 8% since our last report dated October 23, 2017, outperforming its benchmarks, the TSX-V Index and the Global X Lithium and Battery ETF, which gained 4% and lost 13% respectively, over the same period. Notable performers for this report include:

1) Orocobre Ltd. (TSX:ORL), which climbed 34% due to strong production results and rising lithium demand

2) Bacanora Minerals Ltd. (TSXV:BCN), which increased 46% as the Company secured rights to its lithium project

3) Katanga Mining Ltd. (TSX:KAT), which powered as much as 82% higher as the Company announced the restart of its cobalt production, but decreased 38% due to the Democratic Republic of the Congo’s new mining code

Industry Highlights:

• Sociedad Quimaca y Minera de Chile (NYSE:SQM) has resolved its dispute with Chile’s economic development agency, Corfo. Corfo had claimed that SQM was underpaying royalties per its lease agreement from its project in the Atacama salt desert. The Company is currently responsible for approximately 27% of the market. The Company is expected to increase production to 163,000 tonnes by 2024. Lithium stocks dropped significantly following the announcement, with junior minors Galaxy Resources (ASX:GXY), Lithium Americas (TSX:LAC), and Nemaska Lithium (TSX:NMX) dropping 7%, 15%, and 7%, respectively. Below are infographics on the supply of lithium, prior to the announcement.

Battery Metals Index October 23, 2017 - February 9, 2018

Chris Thompson | Head of Research | Ubika Research | [email protected] | 1 (416) 574-0469Patrick Smith | Analyst | Ubika Research | [email protected] | 1 (647) 444-5506William Xiao | Associate | Ubika Research | [email protected] | 1 (647) 828-4632

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UB20: 7.7% (81.5% Y/Y)TSX-V: 3.6% (-1.5% Y/Y)Global X Lithium ETF: -12.6% (29.9% Y/Y)

Dollar amounts in CAD unless otherwise stated.

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UB20 Index TSX-V Global X Lithium & Battery Tech ETF

UB20: Performance Distribution

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Berkwood Resources Ltd

Critical Elements Corp

Lithium Americas Corp

Galaxy Resources Ltd

Neo Lithium Corp

Nemaska Lithium Inc

Neometals Ltd

Pilbara Minerals Ltd

CBLT Inc

Altura Mining Ltd

Ecobalt Solutions Inc

Bacanora Minerals Ltd

Katanga Mining Ltd

Orocobre Ltd

Frontier Lithium Inc

Power Metals Corp

Millennial Lithium Corp

Advantage Lithium Corp

Castle Silver Resources Inc

Power Americas Minerals Corp

Top Volume Gainers (m/m)

Source: Bacanora Minerals Presentation

Figure 1: Global Lithium Supply

All figures use price close as of February 9

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PWM.V AJM.AX NMX.TO PAM.V

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The increased production will skew global lithium production towards brine. Below is a projection of global lithium production growth.

Figure 2: Lithium Cost of Production

Source: Deutsche Bank Lithium Report

• The Democratic Republic of the Congo (DRC) is set to remove a provision exempting licence holders of compliance with its new mining code. More than half of the world’s cobalt production comes from the DRC. Beginning as soon as the president signs the new bill, the country is expected to raise royalties from 2-2.5% to 3.5% for cobalt and copper, the DRC’s primary exports. Additionally, the code will allow the government to place a 10% royalty on metals it deems “strategic substances,” implementing a 50% tax on “super profits,” which is deemed as income from increased profits, when commodity prices rise above levels indicated in a project’s Feasibility Study. Both houses of the Congolese parliament have passed the bill. To follow, the president must simply sign the bill for it to take effect.

Upcoming Conferences:

Prospectors & Developers Association Conference – March 4-7, 2018. PDAC is the world’s leading convention for those connected with mining and exploration. In 2017, it hosted 24,000 attendees and nearly 500 speakers.





The Company’s stock jumped 31% at the end of October 2017, as it announced it was on track to meet its guidance. After falling 13% at the beginning of December, the stock increased another 19%, as the Orocobre announced 25% increased sales pricing from H1 to H2 2017.

On January 15, the Company announced an expansion of its partnership with Toyota Tsuho (TYO:8015). TYO purchased 15% of Orocobre for AUS$292M and is the exclusive sales agent for the Olaroz facility’s lithium. The Company is currently finalizing studies on a prospective lithium hydroxide plant in Japan, with its partner TYO, for estimated capital cost of $65M.

The Company has a price target of $5.58, representing an 8% downside. The Company has 1 Buy rating.

Notable Performers:

Orocobre Ltd. (TSX:ORL)

Orocobre is an Australia-based lithium producer operating in Argentina. The Company has an operating lithium facility at Salar de Olaroz, and a boron facility at Campo Quijano. Orocobre’s stock price has increased 34% since our last report date, due to rising lithium prices, strong production results, and its expanded partnership with Toyota Tsuho.

Orocobre’s Salar de Olaroz lithium facility is located 230km northwest of Jujuy in Argentina. The facility produces lithium carbonate from brine. The site hosts P&P mineral reserves of 6.4M of lithium carbonate grading 690 mg/L li, as well as 19.3Mt of potash grading 5730 mg/L K.

The Company produced 11,862 tonnes of lithium carbonate in 2017, up from 6,903 in 2016, and expects to produce 14,000 in 2018. Orocobre plans to expand production to 42,500t/y. Construction for this expansion begins in Q2 2018, with first production expected Q3 2019. Below is the expected cost of production, compared to other producers.

Figure 3: Lithium Cost of Production

Source: Deutsche Bank Lithium Report





Bacanora Minerals Ltd. (TSXV:BCN)

Bacanora Minerals is a Canada-based lithium company operating in Mexico. The Company is progressing towards production at its Sonora project, and has a boron facility and a German lithium project. The Company’s stock has climbed 46% since our last report date, due to rising lithium prices and secured project rights.

The Company’s flagship asset, the permitted Sonora open-pit project, is located 190km northeast of Hermosillo, and comprises 98,000 hectares under 10 concessions. The site hosts P&P mineral reserves of 291Mt lithium carbonate grading 3,250 ppm Li and 1.4% K. The Company is currently constructing infrastructure for the site and expects to begin production late-2019. BCN expects to produce 17,500t/y LCE in Stage 1, lasting two years, before further expanding production to 35,000t/y LCE in Stage 2. Bacanora also plans to begin potassium sulphate production in Stage 2, reaching 35,000t/y LCE. Below is a summary of key metrics from the project’s January 2018 Feasibility Study.

Figure 4: Feasibility Study Metrics

Source: Company Presentation

The Company has an agreement with Hanwa Co. Ltd. (TYO:8078) to purchase 70-100% of the lithium carbonate produced during Stage 1 at market prices, as well as the option to purchase 100% of Stage 2 production.

On November 1, Bacanora’s stock increased 28% over a one-week period after the Company announced it secured access and surface rights for the Sonora project.

On November 17, Bacanora filed against the Orr-Ewing estate in the Court of the Queen’s Bench in Alberta. The Orr-Ewing estate owns 8% of the Company and holds a 3% royalty on the Sonora project. The Company claims that the royalty was granted based on misrepresentations made by the late Mr. Orr-Ewing, and has asked the court to void it.





On December 21, Next View Capital agreed to acquire 20% of Bacanora for $53.5M. In addition, the Company agreed to supply Next View with 5,000t lithium carbonate/year during Stage 1 production, and 15,000t/y during Stage 2.

On February 8, the Company announced it intends to re-commence the process of changing domicile of jurisdiction from Canada to the UK. The Company’s stock increased 11% in the day following the announcement.

The Company has a price target of $2.67, representing a 48% upside. One analyst gives it a Buy Rating.

Katanga Mining Ltd. (TSX:KAT)

Katanga is a Switzerland-based copper and cobalt producer operating in the Democratic Republic of Congo. The Company’s stock has risen 27% since our last report date, driven by cobalt price increases and the announcement of the restart of its cobalt operation.

Katanga’s flagship mine, the Kamoto project, is an open-pit mine near Kolwezi in the southeast of the DRC, consisting of six concessions over 4000 hectares. In September 2015, the Company suspended all production of copper and cobalt during the construction of its Whole Ore Leach Project (“WOL Project”). The project includes a new leach plant, upgrades to existing treatment plants, waste stripping, power upgrades, and workforce training, at a cost of US$880M. Below is a table of production by site, prior to the cessation of production.

Figure 5: Historical Production

Source: March 2017 Technical Report





Copper ore production resumed in Q4 2017, with 11.2Mt of waste mining conducted. The Company plans to continue work on the project in Q3 2018.

In 2017, the Company produced 9,500t Cu at Kamoto at a grade of 2.2% Cu. Katanga did not produce any cobalt. The site hosts reserves of 138.1Mt grading 3.2% Cu and 0.5% Co, or 4.4Mt Cu and 0.7Mt Co. On December 11, the Company announced it would resume cobalt production at 30,000t/y. Katanga plans to upgrade its cobalt processing facilities to meet this production guideline. Below is Katanga’s production guidance for FY2018-2020.Figure 6: Katanga Production Guidance

Source: Company Presentation

On November 20, Katanga announced the revision of a number of its financial statements and MD&As. An independent director review, prompted by an Ontario Securities Commission investigation of the Company, found poor accounting practices. Three directors from Glencore (LSE:GLEN), which owns 86% of Katanga, and the Company’s CFO stepped down. Following the announcement, the Company’s stock fell 16%, but shortly recovered. A class-action lawsuit has been filed against Katanga. Lead plaintiff applications closed January 29.

As a result of the cobalt production announcement on December 11, Katanga’s stock rose 41% over three days. After decreasing 2% over two weeks, it increased a further 41% as cobalt prices rose. The stock has since lost 38% of its value due to concerns about the DRC’s mining code.

The Company has no analyst coverage.

Upcoming Catalysts:

Demand for electric vehicles is expected to continue to rise, and battery metals to rise with it. While lithium prices are likely to be set back by the SQM announcement, cobalt prices are set to soar as the DRC’s code reduces profits from the world’s largest cobalt producer. Cobalt producers and explorers from other countries could see strong returns over the coming months.

Automobile companies have begun seeking partnerships to secure supply for the upcoming years. Earlier, we discussed Toyota’s partnership with Orocobre. Tesla (NASDAQ:TSLA) is reportedly in talks to purchase 32% of SQM (NYSE:SQM) from Nutrien Group (TSX:NTR), as Nutrien is required to divest from SQM as part of its recent merger. BMW (ETR:BMW) is close to signing a 10-year supply contract for lithium and cobalt. Other companies may soon attempt to find similar agreements.





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