Fortune Minerals Limited (TSX: FT / OTC: FTMDF / Frankfurt ... · Sector/Industry: Junior Resource...

Siddharth Rajeev, B.Tech, MBA, CFA

November 14, 2017

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Fortune Minerals Limited (TSX: FT / OTC: FTMDF / Frankfurt: FMP) – Raising Fair Value Estimate

Sector/Industry: Junior Resource www.fortuneminerals.com

Market Data (as of November 14, 2017)

Current Price C$0.20

Fair Value C$0.97

Rating* BUY

Risk* 5 (Highly Spec)

52 Week Range C$0.10 - C$0.34

Shares O/S 302,085,257

Market Cap C$60.42 mm

Current Yield N/A

P/E (forward) N/A

P/B 1.0x

YoY Return 66.7%

YoY TSX 9.2% *see back of report for rating and risk definitions * All figures in C$ unless otherwise specified.

Highlights The price of cobalt has increased from just US$10/lb in late 2015, to

the current price of US$27.9/lb, reflecting an increase of approximately 179%.

We continue to believe the strong fundamentals of cobalt, and the uniqueness of NICO as one of the only known potential primary cobalt and gold producers in North America, make Fortune Minerals Limited (“company”, “Fortune”) a very compelling story for both mining and technology institutional investors and private equity.

We estimate that Fortune’s Enterprise Value (“EV”) is just $0.26

per cobalt equivalent lb versus the average of $1.03 per lb for

cobalt juniors.

The Government of the Northwest Territories ("GNWT") recently announced it has shortlisted three consortiums of multi-national companies to compete for a contract to design, construct and maintain the Tlicho all-season road to Whati, NWT.

Hatch Ltd., P&E Mining Consultants Inc. and Micon International Limited are currently updating the 2014 feasibility study (“FS”) for NICO, which now includes a scope change for a 20% to 30% production rate increase, based on positive feedback with potential financing partners.

As Fortune’s financial advisor, PwC is continuing to seek project financing opportunities.

At the end of Q2-2017 (ended June 30, 2017), Fortune had cash and working capital of $5.72 million and $5.51 million, respectively.

We are raising our fair value estimate on Fortune’s shares from

$0.85 to $0.97 per share.

Page 2



Progress on the

Tlicho Road

In September 2017, the Government of the Northwest Territories ("GNWT") announced it had shortlisted three consortiums of multi-national companies to compete for a contract to design, construct and maintain the Tlicho all-season road to Whati, NWT. The Request for Proposals (“RFP”) is scheduled to commence in December 2017. The environmental assessment on the road project is expected to be completed by March 2018. The RFP will be for a long-term contract for 75% of the construction costs for the road where the GNWT will repay the consortium with interest. The federal government has already agreed to pay 25% of the construction costs for the road pursuant to the P3 Canada Fund. The total project cost is estimated at $150 million.

As mentioned in our previous reports, this as a major development for Fortune as Whati is located 50 km south of Fortune's NICO project. Fortune will construct a spur road from Whatì to the mine site. The proposed 97 km all-season road will allow Fortune to truck concentrate from Whati to the rail head at Hay River, NWT (400 km), and then by rail to the company’s planned hydrometallurgical processing facility in Saskatchewan, named the Saskatchewan Metals Processing Plant (SMPP), for further downstream processing.

The following maps show the proposed road and the location of NICO.

Source: Government of the Northwest Territories

Page 3



Updated FS

Source: Company

In April 2017, the company retained Hatch Ltd. and Micon International Limited to update the 2014 FS. On November 9, 2017, considering the strong outlook for cobalt, the company announced that they are now evaluating the feasibility of a 20% to 30% increase in the 4,650 tpd operation used in the 2014 FS. If viable, such a scenario will result in an increase in

the annual production of cobalt from 3.5 Mlbs to 4.0 to 4.5 Mlbs per year. In addition, P&E Mining Consultants Inc. is expected to update the reserves using a different NSR cut-off value. We believe the updated estimate will likely include significant material that was previously considered uneconomic at lower cobalt prices. We have presented a sensitivity analysis of our valuation, later in this report, on the above mentioned parameters.

The company also disclosed a number of additional items that are being evaluated in the upcoming FS; key items are listed below:

Optimized Mine Plan and Schedule to target cobalt-rich areas in the initial years to

Page 4



Other

Developments

Cobalt Market

further enhance the project’s economics Update reserves to reflect the significant increase in cobalt prices since the last study. Economies of scale from a higher production rate Additional metallurgical work (completed) to improve the cobalt sulphate and copper

cementation circuits that may also result in improved recovery rates.

As additional engineering work is required based on the higher production rate, the

company has not disclosed an expected timeline for completion of the FS.

Fortune has the major permits in place to commence construction of the mine, and an environmental assessment approval for both the mine in the NWT, and the refinery in Saskatchewan. The following points highlight the company’s current key initiatives

The company continues to work with PwC, as its Financial Advisor, to secure project financing for NICO. PwC was hired in January 2017. Management has indicated that potential strategic partners have executed confidentiality agreements.

The company did work at the NICO site last summer to improve and expand roads to

the mine in preparation of more efficient transportation of supplies and materials on the winter ice road.

Strengthens management team, which we believe demonstrates management’s positive outlook and intent to aggressively advance the NICO project to production. In June 2017, Glen Koropchuk was appointed as the Technical Director and Chief Operating Officer. Glen Koropchuk was appointed as a Director last year. The company had also made some key hires last year, including the addition of David Ramsey to the board of directors, and David Massola as the CFO. David Ramsay is a former Cabinet Minister in the NWT government. Glen Koropchuk, as former COO of De Beers Canada, led the permitting, aboriginal engagement and project management for the Gahcho Kué diamond mine (costing $1 billion), in the NWT. He had a 30-year career with Anglo American. David Massola is the former CFO of De Beers Canada and BHP-Billiton Diamonds, and was also the former CFO of a company that developed a copper mine in the Dominican Republic.

Key potential catalysts in the next 12 months are listed below:

Updated feasibility study results reflecting the economies of scale of expanded project

project financing and/or identify strategic partners to advance NICO to production

re-zoning upon receipt of permits for the SMPP site in Saskatchewan

agreement with the Tlicho Government for the NICO access road

road construction agreements and site preparation plans Cobalt was one of the best performing commodities over the past two years. Prices increased from just US$10/lb late 2015, to the current price of US$27.9/lb, reflecting an increase of approximately 179%.

Page 5



The following section is a brief update on supply and demand data since our last update report. The chart below shows cobalt’s demand by application.

Source: CDI and Benchmark Minerals

As shown in the above chart, approximately 53% of the global refined cobalt production in 2016 was used in batteries, followed by super-alloys (21%). The following table shows the demand growth by application. The demand for batteries, which had only accounted for 27% of the total demand in 2010, increased at a CAGR of 20%, to 49,794 tonnes in 2016. The total demand for cobalt was 93,950 tonnes in 2016, up 7.5% p.a. from 2010.

Page 6



Source: CDI and Benchmark Minerals

We continue to expect the demand for cobalt in rechargeable batteries will be the key

demand driver of cobalt going forward. The most common rechargeable batteries in the market today are Lithium-Ion batteries (“LIB”). Declining technology costs (see chart below) are expected to drive demand for LIBs.

The current production capacity of lithium-ion batteries is approximately 75 GWh globally. However, the total capacity is estimated to reach 285 GWh by 2020.

Page 7



The following chart shows that EV car sales are estimated to be approximately 54% of light-duty vehicle sales by 2040 globally.

The Commodities Research Unit (“CRU”) Group estimates electric car and plug-in hybrid vehicle sales could reach approximately 14.2 million by 2025 (up from 0.77 million last year), reflecting a CAGR of 38% per annum (“p.a.”) from 2016 to 2025.

Page 8



We estimate this would equate to approximately 140,000 tonnes of cobalt demand just

from EVs (14 million vehicles @ 10kg of cobalt per vehicle).

With regard to supply, the DRC accounted for 66,000 tonnes, or 54% of the mine production and dominates the space. Canada is the third largest mine producer at 7,300 tones, or 6% of global production, in 2016.

Global mine production increased by 6.7% p.a. from 2010 to 2016 to 123,000 tonnes. There are growing concerns over cobalt ore supplies from the DRC. Several major users of cobalt have explicitly announced their decision to cut purchases from the DRC. Apple Inc. (NASDAQ:AAPL) indicated earlier this year that it will temporarily halt the purchase of Cobalt from the DRC. Samsung (KOSE: A005930) and LG Chem (KOSE: A051910) have also expressed concerns. We believe these growing concerns will play a critical role in manufacturers’ decisions on where to source their cobalt supplies from.

Page 9



Financials

Stock Options

and Warrants

The following chart shows the expected deficit in the cobalt market. The consensus is that the market may be in a 7,000 tonne deficit by 2020.

Based on the strong demand growth forecast, and the high potential of users to seek supply outside of the DRC, we maintain a very positive outlook on cobalt prices. We believe advanced stage primary cobalt projects in politically stable jurisdictions, such as NICO, have a very strong advantage.

At the end of Q2-2017 (ended June 30, 2017) the company had cash and working capital of $5.72 million and $5.51 million, respectively. We estimate the company had a burn rate (cash spent on operating and investing activities) of $1.09 million per month in the first six months of 2017. The following table summarizes the company’s liquidity position:

Fortune has $8.75 million in debentures outstanding. These debentures are due in August 2022, and bear interest accruing at 5% p.a. (paid at maturity in 2022). The company has 18.90 million options outstanding (weighted average exercise price of $0.15 per share) and 22.15 million warrants (weighted average exercise price of $0.30 per share) outstanding. At this time, 17.58 million options and 6.25 million warrants are in-the-money. The company can raise up to $2.87 million if all these options and warrants are

exercised.

Page 10



Valuation &

Rating

The 2014 Feasibility Study by Micon International Limited estimated a base-case after-tax NPV @ 7% of $224 million, with an after-tax Internal Rate of Return (“IRR”) of 15.1%.

Proven and Probable Reserve33.08Mt @ 1.03 gpt Au, 0.11%

Co, 0.14% Bi & 0.04% Cu

Processing Rate 4,650 tpd

Model Price Annual

Production

LOM

Production

LOM

Revenues

($)

% of Total

Gold US$1,350/oz 41.4 koz 814 koz 1,249,358 32.5%

Cobalt (in sulphate) US$19.04/lb3.56 Mlbs / 1,615

tonnes 69.53 Mlbs 1,504,283 39.2%

Bismuth US$12.64/lb3.86 Mlbs / 1,749

tonnes 73.66 Mlbs 1,057,972 27.5%

Copper US$2.38/lb0.58 Mlbs / 264

tonnes 11.20 Mlbs 30,214 0.8%

Mine Life 20 years

Initial Capital - $ $589M

Exchange Rate 0.88

NWT Operating Cost ($/t) - ore

mined$39.71

SMPP Operating Cost ($/t) $18.11 / t mined or $564 / t

concenrate

After-Tax IRR 15.1%

After-Tax NPV @ 7% - C$ $224M

2014 FS (Report by Micon)

The 2014 FS was based on an average cobalt metal price of US$16/lb, and an average price of US$19.04/lb for cobalt sulphate (the final product of NICO; exchange rate of C$:US$ of 0.88). Our valuation models were based on an average price of US$19.66/lb for cobalt sulphate and US$1,300/oz gold. The following table shows our valuation based on cobalt pricing of US$25/lb.

Page 11



The following tables show the sensitivity of our valuation to key inputs.

Page 12



The following table shows the Enterprise Value (“EV”) to resource of a few cobalt juniors. As shown, Fortune’s EV is just $0.26 per cobalt equivalent lb versus the average of $1.03 per lb.

Page 13



Risks

Our valuation on FT’s shares, based on an EV of $1.03 per lb, is $0.67 per share. The average of our DCF and comparables valuation is $0.97 per share. Therefore, we

are raising our fair value estimate on FT from $0.85 to $0.97 per share.

We believe the company is exposed to the following key risks (not exhaustive): The value of the company is highly dependent on commodity prices (primarily cobalt and

gold). The company does not currently have any operating mines. Larger projects tend to have higher CAPEX. Project financing and/or off-take agreements may take longer than expected. Development risks. Access to capital and share dilution. The company has approximately $8.75 million in debentures outstanding, but due only in

2022. As with most junior exploration / development companies, we continue to rate FT’s shares a risk of 5 (Highly Speculative).

Page 14



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by FT to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, FT has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (72%), HOLD (8%), SELL (4%), SUSPEND (16%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

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