bell potter

27 July 2011

Kingsrose Mining (KRM)

New discoveries add value

Recommendation Buy (unchanged) Price $1.50 Target (12 months) $2.10 (previously $2.00)

Analyst Peter Chapman 612 8224 2847 Associate Analyst Chris Whitehead 612 8224 2838 Authorisation Fleur Grose 613 9235 1678

Expected Return

Capital growth 40%Dividend yield 0%Total expected return 40%Company Data & Ratios

Enterprise value $416mMarket cap $444mIssued capital 265.5mFree float 70%Avg. daily vol. (52wk) 364,20012 month price range $0.89-1.96GICS sector

Materials

Price Performance

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURESTHIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 5 THAT FORM PART OF IT.

June quarter gold output ahead of forecast June quarter production of gold from the company’s Way Linggo mine in Sumatra was 8,756oz and silver 108,430oz, both some 8% ahead of guidance. This was the fourth quarter of production from the Way Linggo underground mine since operations commenced in 3Q2010, and each quarter tonnes of ore mined have increased as the operation ramps up. Lower grades resulted in lower gold output compared with the March quarter, but is expected to increase steadily from here on in.

This remains a very low cost operation due to the high gold grade and substantial silver credits. Cash operating costs for the quarter were US$145/oz.

New discoveries add value Further positive drilling results were reported that confirmed the significance of the new Talang Santo discovery, 17km from the mine by road and looking more like becoming the company’s second mine. Other similar high grade vein systems have been discovered in the area as the intensive drilling program involving up to nine rigs deliver results. Recognising the advances on the exploration front, we have added to our ‘Exploration Value’ assessment leading to a 10c lift to the Target Price, now $2.10.

Investment view KRM is a specialist high grade, narrow vein underground gold miner and explorer, operating the Way Linggo gold mine and conducting an aggressive exploration drilling program in the Lampung Province of southern Sumatra, Indonesia. Although a relatively small producer at c.50koz gold pa, growth is likely to come firstly from increased plant capacity and ultimately from discovery of new underground ore sources. We continue to recommend Buy.

Absolute Price Earnings Forecast Year end June 2010a 2011f 2012f 2013f

Sales (A$m) 0 40 82 94

EBITDA (A$m) -6 22 71 83

NPAT (reported) (A$m) -1.3 8.0 44.3 53.1

NPAT (adjusted) (A$m) -6.5 13.1 44.3 53.1

EPS (adjusted) (¢ps) -1 3 17 18

EPS growth (%) -85 -658 455 9

PER (x) na 49.5 8.9 8.2

FCF Yield (%) na 15 7 6

EV/EBITDA (x) na 19 5 4

Dividend (¢ps) 0.0 0.0 0.0 0.0

Yield (%) 0.0 0.0 0.0 0.0

ROE (%) -3.9 15.6 43.6 30.4

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES

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Kingsrose Mining (KRM) 27 July 2011

June quarter highlights Way Linggo operation performing well This was the fourth quarter of production from the Way Linggo underground mine since operations commenced in 3Q2010, and each quarter ore mined and processed has increased. Gold output was lower than the March quarter due to lower grades, but was higher than guidance for both gold and silver;

• Gold and silver poured 8,756oz and 108,430oz respectively;

• Cash operating costs US$145/oz after silver credits;

• Ore mined 20,410t, highest to date (57% development, 43% stoping);

• Ore processed 23,487t, highest to date, at 12.5g/t Au, 161g/t Ag. Grades were lower than the March quarter due to the high proportion of development ore and lower grade stockpiles. Remaining stockpile grades have come down to 6.1g/t;

• Gold sold 9,098oz at an average price of US$1,510/oz.

Installation of the SAG mill is behind schedule due to custom clearances but is expected to be up and running by the end of the September quarter. The new mill is designed to improve handling of the wet clay ores leading to greater throughputs. This, along with other improved practices, should result in higher plant capacity from the December quarter.

New discoveries at Talang confirmed by more drill results A number of high grade epithermal veins have been intersected in the Talang area in the north western corner of the tenement CoW. The drill results reported in the quarterly are consistent with those reported earlier, the main prospects being:

• Talang Santo. More drill hole results were reported with ore grade intercepts now encountered over a strike length of 200m, and remaining open. This is already a strike length of a similar dimension to the Way Linggo mine. New holes returned 4.8m at 10.3g/t Au, 33.6 g/t Ag (DDH-206) and 1.4m at 14.4 g/t Au, 25.8g/t Ag;

• Talang Toha. Drilling to date has confirmed the occurrence of a vein system over 170m strike, again with good grade (5.4g/t Au, 13.0g/t Ag);

• Talang Samin, where a vein at depth has the potential to join with Talang Toha, 500m to the north. A separate vein system has also been intersected at Talang Samin along 80m of strike;

• At the Way Linggo mine, results from several new holes have increased the potential of mineralisation at depth;

• At Semung Kecil, in the southeast, considered very similar to Way Linggo, difficult access has limited work to reconnaissance only while road construction is contemplated.

A considerable exploration effort continues over the CoW with nine rigs now on site. The new 17km road to the Talang area will allow that area to be a focus of drilling, while providing possible future ore hauling to the mill.


Kingsrose Mining (KRM) Company Description Kingsrose Mining (KRM) is a specialist high grade, narrow vein underground gold miner and explorer. The company operates the Way Linggo gold mine in The Lampung Province of southern Sumatra, Indonesia and is evaluating base metals tailings deposits in Sardinia, Italy. KRM listed on the Australian Stock Exchange in December 2007.

Way Linggo (KRM 85%) is a narrow vein, high grade gold and silver underground mine with rated production of 140kt ore and a current mine life of 4 years. The epithermal setting provides excellent potential for discovery of similar mineralised structures. A new treatment plant has been built on site featuring leach and Merrill Crowe processes that is expected to yield gold/silver bullion at a rate of 45-65kozpa, depending on head grades. Under the COW there are certain divestment requirements, which are to be done at fair value.

The SARINC project on the Mediterranean island of Sardinia (KRM 85%) consists of vast low grade tailings dumps of predominantly lead, zinc and silver. Progress has been slow in dealing with authorites.

Ordinary shares on issue total 265.5m, listed options 20.6m. Cash and working capital at the end of September was $28m with no corporate debt.

Majority shareholders are Citicorp Noms (17.6%), Advanced Concept Holdings (13.2%), KRM WA (8.2%).

Directors: John Morris (Non-Executive Chairman), Chris Start (Managing Director); Peter Cook (Non-Executive), Bill Phillips (Non-Executive), Tim Spencer (Finance Director).

Investment Strategy We recommend Buy KRM as a growing gold asset. We expect to see growth of production and reserves/resources through discovery and facilities expansion.

Valuation SCE estimates a 12 months NPV of $1.67 to which we apply a 25% market premium for a Target Price of $2.10 per share.

Risks Ore reserves are low, however this is by nature of the high grade epithermal deposit and the strategy of containing exploration and reserve drilling until it can be funded by internal cashflow.

Minerals exploration is an inherently risky activity with no guarantee of success. However, drilling risk has been mitigated by preliminary exploration work including: review of all previous exploration data by specialists; helicopter aeromagnetics/radiometrics geophysical survey, geological mapping, geochemical sediment sampling, ground geophysics and trenching.

Commodity price volatility. As no hedging is in place, gold and silver prices received will be determined by the market.


Kingsrose Mining as at 27 July 2011

Recommendation Buy Price $1.50 Target (12 months) $2.10

Table 1 - Financial summary

SOURCE: BELL POTTER SECURITIES ESTIMATES

Kingsrose Mining Ltd (KRM) Share price: A$ 1.50$ As at 27-Jul-11 Market Cap: A$m diluted 444$ PROFIT AND LOSS (A$) VALUATION DATA (A$)Y/e June 30 2009a 2010a 2011f 2012f 2013f 2009a 2010a 2011f 2012f 2013fSales revenue 4 0 40 82 94 Net profit adj ($m) -6 -6 13 44 53EBITDA -5 -6 22 71 83 EPS (c) -4 -0.5 3.0 16.8 18.3Depreciation -1 0 -3 -8 -11 EPS growth (%) 0 -85 -658 455 9Amortisation 0 0 0 0 0 P/E ratio (x) na na 49.5 8.9 8.2EBIT -5 -6 19 62 72 CFPS (c) na na 10 20 24Other income (expenses) 0 0 0 0 0 Price/CF (x) na na 15.0 7.4 6.3Net Interest Expense 0 0 0 1 4 DPS (c) 0 0 0 0 0Pre-tax profit -6 -6 19 63 76 Yield (%) 0 0 0 0 0Tax 0 0 -6 -19 -23 Franking (%) 0 0 0 0 0Net Profit -6 -6 13 44 53 EV/EBITDA na na 19.4 5.4 3.7Adjustments 0 0 0 0 0 EBITDA margin (%) na na 56 86 88SCEQ adj profit -5.6 -6.5 13.1 44.3 53.1 Recommendation: BuyOne-off items 0.0 5.1 -5.1 0.0 0.0 Valuation per share: 1.65Reported net profit -5.6 -1.3 8.0 44.3 53.1 Target price (12 mth): 2.10

Total Return (including 40%CASHFLOW (A$) PROFITABILITY RATIOS

2009a 2010a 2011f 2012f 2013f 2009a 2010a 2011f 2012f 2013fReceipts from customers 5 6 51 80 94 EBITDA/sales (%) -117 -1704 56 86 88Payments to suppliers -8 -9 -20 -5 -5 EBIT/sales (%) -132 -1795 47 76 76Net interest 0 0 0 1 4 Return on assets (%) -17 -3 14 42 30Tax paid 0 0 -6 -19 -23 Return on equity (%) -22 -4 16 44 30Other 0 0 1 -3 -1 Return on funds empl’d -57 -4 21 108 142Operating cashflow -3 -2 26 53 69 Dividend cover (x) 0 0 3 6 9

Effective tax rate (%) 0 0 30 30 30Capex -2 -15 -9 -1 -1Investments 0 0 0 0 0 LIQUIDITY AND LEVERAGEAsset sales 0 0 1 0 0 2009a 2010a 2011f 2012f 2013fOther -1 -1 2 -5 -5 Net debt/(cash) ($m) -9 1 -13 -60 -137Investing cashflow -3 -16 -6 -6 -6 Net debt/equity (%) -36 2 -26 -60 -79

Net interest cover (x) 76 11 -121 54 17Change in borrowings -1 0 -13 0 0 Current ratio (x) 2 1 22 79 124Equity raised 21 11 0 0 14 Inventory turnover 5 2 3 1 1Dividends paid 0 0 0 0 0 Inventory/sales 5 8 11 7 8Other -1 0 0 0 0Financing cashflow 19 10 -13 0 14 INTERIMS (A$)

2009a 2010a 2011f 2012f 2013fNet change in cash 12 -8 7 47 77 Sales revenue 3 0 9 37 48

EBITDA 0 -3 -1 32 43Cash at end of period 16 8 15 62 139 SCEQ adj profit 0 -3 -1 20 27

One-off items 0 3 -5 0 0Reported net profit 0 -1 -6 20 27

BALANCE SHEET (A$) VALUATION2009a 2010a 2011f 2012f 2013f Current +12Mths +24Mths

Cash 16 8 15 62 139 A$m $ps $ps $psReceivables 0 2 5 7 7 Way Linggo (85%) 288 0.97 0.83 0.68Inventories 1 2 3 7 8 Sarinc (85%) 12 0.04 0.04 0.04Investments 0 0 0 0 0 Corporate -13 -0.04 -0.04 -0.04Other 0 3 -6 -6 -6 Exploration 173 0.58 0.58 0.58Current assets 17 14 17 70 148 Options 15 0.05 0.05 0.05

Net Cash 13 0.04 0.20 0.46PPE 16 31 33 26 17 Total 488 1.65 1.67 1.78Investments 0 0 0 0 0Intangibles 0 2 4 9 14 Production Assumptions - (based on 85% Way Linggo)Other 0 0 0 0 0 Way Linggo 2009a 2010a 2011f 2012f 2013fNon-current assets 16 33 38 36 31 Throughput (kt) 66 120 140 Total assets 34 46 55 106 179 Gold Grade (g/t) 14.1 15.0 15.0

Gold Recovery 91% 92% 92%Payables 1 3 1 1 1 Gold (koz) 25 53 62Debt 0 9 2 2 2 Silver (koz) 287 549 716Provisions 0 0 1 1 1 Gold Equivalent (koz) 32 65 77Other 6 1 1 1 1 Gold Equiv (koz) KCN 27 56 66Total liabilities 8 12 4 4 4 Cash Costs (US$/oz) 236 25 30

Cash Costs (A$/oz) 239 23 30Shareholders’ equity 25 34 51 102 172Minorities 0 0 0 0 3 ASSUMPTIONSTotal shareholders funds 25 34 51 102 175 2009a 2010a 2011f 2012f 2013f

Gold Price (US$/oz) 875 1095 1374 1575 1400Total funds employed 10 35 38 41 38 Silver Price (US$/oz) 12.90 15.58 29.00 35.00 29.61

A$ 0.75 0.88 0.99 1.08 0.98W/A diluted shares on iss 154 241 263 263 290 Gold Price (A$/oz) 1171 1240 1390 1465 1436


Bell Potter Securities Limited ACN 25 006 390 7721 Level 32, Aurora Place 88 Phillip Street, Sydney 2000 Telephone +61 2 8224 2811 Facsimile +61 2 9231 0588 www.bellpotter.com.au

Recommendation structure

Spec Buy: Expect >30% total return on a 12 month view but carries significantly higher risk than its sector

Buy: Expect >15% total return on a 12 month view

Accumulate: Expect total return between 5% and 15% on a 12 month view

Hold: Expect total return between -5% and 5% on a 12 month view

Reduce: Expect total return between -15% and -5% on a 12 month view

Sell: Expect <-15% total return on a 12 month view

Research Team Steve Goldberg

Head of Research T 612 8224 2809 E [email protected]

Trent Allen Resources Analyst Emerging Growth T 612 8224 2868 E [email protected]

Daniel Blair Industrial Analyst Telco/Media T 612 8224 2886 E [email protected]

Peter Chapman Resources Analyst Gold/Uranium T 612 8224 2847 E [email protected]

David George Resources Analyst Diversifieds T 613 9235 1972 E [email protected]

Fleur Grose Resources Analyst Iron Ore T 613 9235 1678 E [email protected]

Johan Hedstrom Resources Analyst Energy T 612 8224 2859 E [email protected]

Justin Hilford Industrial Analyst Emerging Growth T 613 9235 1966 E [email protected]

Stuart Howe Resources Analyst Coal T 613 9235 1783 E [email protected]

Judith Kan Associate Resources Analyst Energy T 612 8224 2844 E [email protected]

TS Lim Financials Analyst Banks/Regionals T 612 8224 2810 E [email protected]

Toby Molineaux Associate Industrial Analyst Retail T 612 8224 2813 E [email protected]

John O’Shea Industrial Analyst Emerging Growth T 613 9235 1633 E [email protected]

Paresh Patel Industrial Analyst Retail/Beverages T 612 8224 2894 E [email protected]

Stuart Roberts Industrial Analyst Healthcare/Biotech T 612 8224 2871 E [email protected]

Emma Sellen Executive Assistant T 612 8224 2853 E [email protected]

Jonathan Snape Industrial Analyst Emerging Growth T 613 9235 1601 E [email protected]

Mathan Somasundaram Quantitative Analyst Head of Quant & Data Services T 612 8224 2825 E [email protected]

Lafitani Sotiriou Financials Analyst Diversified Financials T 613 9235 1668 E [email protected]

Janice Tai Quantitative & System Analyst T 612 8224 2833 E [email protected]

Sam Thornton Associate Industrial Analyst Telco/Media T 612 8224 2804 E [email protected]

Fred Truong Associate Resources Analyst Resources T 613 9235 1629 E [email protected]

Chris Whitehead Associate Resources Analyst Emerging Growth T 612 8224 2838 E [email protected]

The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.

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