We say Price Target Strategic Target BUY

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1 PILBARA LIMITED INITIATION: Charging up the Pilbara Our Top Pick in the ASX Lithium Space Analyst Phone Date Steuart McIntyre December 2015 We say Price Target Strategic Target BUY Pilbara Minerals is one of only three ASX-listed lithium plays with a market cap >A$100m and is the only one with a 100%-owned project in a low-risk jurisdiction. Its flagship Pilgangoora lithium project is a hard-rock deposit, which compared to brine projects, tend to be lower capex and faster to bring into production, albeit typically at higher opex. That said, once in production, on our estimates at current prices, Pilgangoora should enjoy healthy EBITDA margins of ~50-60%. PLS SHARE PRICE (A$) $0.40 FORECAST EBITDA A$m COMPANY DATA Enterprise value A$194m 150 Diluted market cap* A$200m $0.30 Diluted shares* 908m 100 Free float 100% $ month price range GICS sector Materials 50 Management holds ~13.3% (fully diluted) $0.10 * Diluted for 115m options - $0.00 Dec14 Jun15 Dec15 IMPLIED RETURN PLS ASX 200 (relative) (50) FY18E FY19E FY20E FY21E Total expected return 82% A VERY STRONG MACRO THEMATIC Unlike most commodities, the lithium sector has seen strong demand, constrained supply, and a rally in lithium prices. But more importantly, future demand looks likely to be strong, driven by the uptake of lithium batteries, particularly through electric cars and static storage. The supply side also appears constrained which could lead to higher prices if demand outstrips supply. THE SECOND LARGEST SPODUMENE DEPOSIT GLOBALLY There are relatively few hard rock lithium deposits of comparable grade and scale to PLS s Pilgangoora project in WA, which is the second largest spodumene deposit in the world. It also may have significant strategic value to end users in glass and ceramic markets given its low-iron content. PLS has an exploration target of 80-90mt at % Li 2 O. KEY NEAR-TERM CATALYSTS IMMINENT At Pilgangoora, the company is aiming to release an updated resource in late January 2016, followed by a Pre-Feasibility Study (PFS) in February It is also targeting completion of a Definitive Feasibility Study (DFS) by July The company raised A$12m at 23c in late November 2015 and is fully funded through to the completion of a DFS for Pilgangoora. BLUE OCEAN EQUITIES PTY. LTD. L39, 88 PHILLIP ST SYDNEY NSW 2000 AFSL ABN

2 CONTENTS COMPANY OVERVIEW 3 THE PILGANGOORA LITHIUM PROJECT 4 Current Resource 4 Exploration Target 6 Potential to Produce A Premium-Priced Product 6 Metallurgical Testwork 7 Mining & Processing 7 Infrastructure 7 Considerable Interest From Potential End Users 8 Permitting & Native Title 8 Development Timetable 8 Pilgangoora Site Visit Photos from Dec THE TABBA TABBA TANTALUM PROJECT 10 Tabba Tabba Site Visit Photos from Dec LITHIUM MARKET STRONG DEMAND OUTLOOK 11 Lithium Supply 11 Lithium Demand 13 Lithium Battery Demand The Key Driver 14 Lithium Battery Demand Electric Cars & Grid Storage 15 Lithium Battery Production Capacity to Triple by Lithium Prices 18 TANTALUM MARKET AN IMPORTANT NOTE 19 ASX LISTED LITHIUM EXPOSURES 20 INVESTMENT PROPOSITION 21 Base Case Valuation 21 Upside Case Valuation 22 Funding Assumptions 22 Price Target & Rating 23 Strategic Target 23 Near-term Catalysts 23 Key Risks 23 Model Summary Financials & Valuation 24 Model Summary Operational Inputs & Free Cash Flow 25 BOARD & MANAGEMENT 26 2

3 COMPANY OVERVIEW Pilbara Minerals Limited (ASX:PLS) is a ~A$200m, ASX-listed lithium developer through its flagship Pilgangoora project in WA. It also owns the small-scale Tabba Tabba tantalum mine (also in WA) which is expected to hit first production this month. For context, Tabba Tabba represents only ~1c in our 40c valuation of Pilbara Minerals. The company s flagship Pilgangoora lithium project is located ~130km from Port Hedland in Western Australia. Tabba Tabba is located ~75km from Port Hedland. In terms of relative importance, Pilgangoora represents over 95% of our valuation of PLS, with over 90% of revenue from lithium. Source: Company In our view, the outlook for lithium demand and prices appears compelling, driven by strong demand for lithium batteries. We also see scope for the strong demand and prices to continue with the accelerating adoption rates of the electric and hybrid cars and static energy storage. Pilbara Minerals is one of only three ASX-listed lithium plays with a market cap >A$100m. Importantly, is the only one with an asset in a low-risk jurisdiction, which owns 100% of its primary lithium project. The rest of the ASX-lithium space is somewhat fragmented. Since acquiring Pilgangoora in July 2014, the company has been blessed with considerable exploration success, growing the resource base from 1.01% Li 2 O to 1.28% Li 2 O, making it the second largest spodumene deposit globally after Greenbushes. The company has an exploration target of % Li 2 O and aims to release a resource update in late Jan 2016, with a Pre-Feasibility Study (PFS) to follow in Feb At the end of September 2015, PLS had A$5.1m in cash and convertible debt of A$5.7m. In late November PLS raised A$12m of new equity at 23c and is now fully funded through to completion of a DFS at Pilgangoora in July We visited both Pilgangoora and Tabba Tabba in early December 2015 and have included photos from our trip later in this report. 3

4 THE PILGANGOORA LITHIUM PROJECT Pilbara Minerals acquired its flagship Pilgangoora lithium project from Global Advanced Metals (GAM) in July 2014 for an undisclosed sum and a 2.5% NSR on any future production. GAM also has a first right of refusal to purchase lithium and tantalum produced at Pilgangoora, but if purchased, the 2.5% NSR does not apply. Given GAM is one of the two major global tantalum refiners, we expect it will buy any tantalum production from Pilgangoora and take the 2.5% NSR on any lithium production. CURRENT RESOURCE On 24 September 2015, Pilbara Minerals released an independent resource update for Pilgangoora, making it the second largest spodumene deposit globally: Pilgangoora Resource, 24 Sept 2015 Source: Company Pilgangoora Resource: Grade vs. Tonnage Curve At a 1% Li 2 O cut-off the resource is: 1.43% Li 2 O Source: Company 4

5 Pilgangoora in Plan The Pilgangoora resource currently covers 4km of strike. The stacked pegmatites have been interpreted as having intruded into north-south trending faults and outcrop at surface in widths ranging from a few metres to tens of meters. The dip of the pegmatite intrusions range from shallow to sub-vertical. The latest phase of drilling was 105 holes for ~11,000m over a strike length of 6km. Source: Company Pilgangoora in Cross Section Source: Company 5

6 EXPLORATION TARGET On 24 September 2015, concurrent with its resource update, Pilbara Minerals also released an Exploration Target which it hopes to achieve with the current round of drilling. The company is aiming to release an updated resource at Pilgangoora in late Jan Pilgangoora Exploration Target Source: Company POTENTIAL TO PRODUCE A PREMIUM-PRICED PRODUCT Based on the metallurgy work to date, we believe PLS has potential to produce 3 products: 1) A chemical grade lithium concentrate: - a 6.0% lithium concentrate (pure spodumene contains 8% Li 2 O) - typically sold to China and converted into lithium carbonate or lithium hydroxide - ultimately used in the battery and other markets (greases, catalysts, etc) - current prices ~US$450/t concentrate 2) A technical grade lithium concentrate: - a highly-specialised, higher-value, low-iron product (see Metallurgical Testwork) - typically a 6.5% lithium concentrate (but can be higher grade) - sold to the glass and ceramic markets (~35% of lithium demand in 2014) - current prices ~US$ /t concentrate and anecdotally prices of up to US$1,000/t (although we have no way to confirm this) - In Dec 2012 Talison believed it was the sole supplier to this market 1 - While we do not know if another producer has since emerged, to us this suggests the potential for significant strategic value (if end users only have one source) 3) A tantalum concentrate: - A 5% tantalum concentrate - current prices ~US$55/lb contained metal for a 20% tantalum concentrate - We assume PLS sells its lower grade product at a 20% discount this price - On our forecasts tantalum represents only 8% of revenue from Pilgangoora 1 Behre Dolbear Technical Report (43-101) on Greenbushes, Dec 2012 (p89, last paragraph). Source: Sedar 6

7 METALLURGICAL TESTWORK During FY15, Pilbara Minerals commissioned a German independent industrial and strategic minerals specialist (ANZAPLAN) to undertake test work to produce a spodumene concentrate from a 100kg sample, which confirmed the potential to produce a low-iron spodumene concentrate suitable for the premium-priced glass and ceramic market 2 : - the most important quality for end users in the glass and ceramic market is iron content - iron oxide limits for this market are between 0.06 wt.-% and 0.17wt.-% - after several purification steps ( grinding, flotation, m agnetic separation, etc) the ironoxide content was reduced to 0.11 wt.-%, which would meet the required specifications Why is low-iron important? - Because a low-iron spodumene is a premium-priced product - Low-iron spodumene is in very short supply in Dec 2012 Talison believed it was the sole supplier to this market 3 - Thus we believe Pilgangoora could be of significant strategic value to end users in the glass and ceramics markets (~35% of lithium demand in 2014) As we understand it, most spodumene ore bodies have too much iron tied up in the crystal lattice to produce a low-iron premium product. The latest Technical Report on Greenbushes (Dec 2012, p51) provides some important insights: Iron bearing mineral species may be removed processing [by magnetic separation] However, any iron in the spodumene crystal lattice is not removed by processing Additional metallurgical testwork is ongoing and will no doubt be a key area of focus for PLS. MINING & PROCESSING We anticipate a conventional truck and shovel mining operation with conventional processing via crushing, grinding, magnetic separation and flotation, similar to other spodumene processing plants (like Greenbushes, Mt Cattlin, etc). INFRASTRUCTURE Access: Pilgangoora is located around 130km from Port Hedland by road. Around 110km of trip is sealed (pre-dominantly the Great Northern Hwy), however there is ~20km of dirt road which may need to be upgraded, including three rail crossings (BHP, FMG and Roy Hill). Water: Water could potentially be sourced from Wogina s bore fields located ~4km south on PLS s tenements. Alternatively, the company has applied for water exploration licences on its own tenements and water exploration is likely to begin around Feb Power: We assume power for a dedicated process plant at Pilgangoora would come in the form of contract diesel gensets (built by a power contractor on a Build-Own-Operate basis) like many of the mines in WA. However there are a range of other possible power options which may be more cost effective including gas or solar power (similar to the solar farm at Sandfire s Degrussa copper mine in WA), perhaps supported by lithium batteries! 2 Pilbara Minerals release, 25 May Behre Dolbear Technical Report (43-101) on Greenbushes, Dec 2012 (p89, last paragraph). Source: Sedar 7

8 CONSIDERABLE INTEREST FROM POTENTIAL END USERS Pilbara Minerals has had significant interest from potential offtake partners, and has 6 nonbinding MOUs in place with groups in China, Japan, South Korea, Europe and North America. Importantly, Pilbara Minerals also employs a very experienced marketing consultant with extensive experience marketing lithium concentrates around the world: Mr Anand Sheth is based in Perth: - Has a degree in Ceramic Engineering - Spent almost 10 years as the Marketing Manager for Talison Minerals (Greenbushes) - Spent almost 5 years as the Sales & Marketing Director for Galaxy Resources - Has extensive relationships with end users of lithium concentrates around the world - Has a detailed understanding of what end users are looking for - i.e. product specifications In our view, Mr Sheth adds considerable credibility to Pilbara Minerals team and will no doubt help ensure the project is designed to meet the needs of end users from inception. Assuming Pilbara Minerals product meets the required specifications, we believe some of these end users may also provide offtake finance to help the company build the project. PERMITTING & NATIVE TITLE Environmental baseline studies have begun and we see no reason why Pilbara Minerals shouldn t be able be able to obtain all the necessary permits to begin construction by mid CY17. On the native title front, heritage surveys were undertaken when the company obtained its exploration permits and no issues were identified. We do not anticipate any material native title issues but expect the company may need to pay a modest access fee in due course when it comes to obtaining a Mining Licence. DEVELOPMENT TIMETABLE The company is aiming to: - complete a PFS for Pilgangoora by Feb followed by a DFS in Jul We assume permits and finance is in place by mid CY17 - followed by a months construction period and - first production in Q4 CY18. Our Assumed Development Timetable Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 PFS DFS Permits/Finance Buffer Construction First Prod Source: Blue Ocean Equities 8

9 PILGANGOORA SITE VISIT PHOTOS FROM DEC 2015 Standing on the Pilgangoora deposit very typical of the terrain in the area. A sample showing the white spodumene crystals and reviewing maps in the core shed. Two good examples of white spodumene crystals in core, which typically have a satin sheen. Source: Blue Ocean site visit Dec

10 THE TABBA TABBA TANTALUM PROJECT Tabba Tabba is a modest sized WA-based tantalum project located ~75km from Port Hedland in WA. The 100%-owned mine is commissioning at present and is expected to reach first production shorty. For context, Tabba Tabba represents 1c in our 40c valuation of PLS. Plant throughput at Tabba Tabba is likely to be ~100ktpa over its month life, with mining scheduled to be completed over the next 8-10 months and processing to continue for months. While PLS has a fixed price contact with its offtake partner, Global Advance Metals (GAM), given the project has experienced extended delays, we see risk around pricing and use current prices to estimate cash flow. At current prices, we estimate Tabba Tabba will generate EBITDA of A$6-8m over the next months. TABBA TABBA SITE VISIT PHOTOS FROM DEC 2015 The Tabba Tabba process plant. Target throughput is 28tph, 10hrs/day for ~100ktpa. The Tabba Tabba ROM stockpile and lined tailings dam. Both sit right next to the process plant. Source: Blue Ocean site visit Dec

11 LITHIUM MARKET STRONG DEMAND OUTLOOK Lithium is a soft, silver-white metal which is highly reactive and does not occur naturally in a pure form. It is also the lightest metal and has double the energy density of the next closest alternative. In our view the outlook for lithium demand is likely to be strong with the potential to be very strong if the adoption rates of electric vehicles and static energy storage accelerates over the next few years, as many market participants believe it will. We believe these markets are close to the tipping point of mainstream adoption on the back of an increased focus on environmental concerns and a wave of supportive government policy. LITHIUM SUPPLY The supply of lithium comes from two main deposit types: - Brines or salt lakes (also known as salars) The main brine producers are based in South America. Brine projects are typically higher capex, but lower opex and tend to have longer lead times. We believe some of the South American brine producers may also face permitting challenges when considering expansions. - Hard-rock deposits (spodumene) Typically lower capex projects and faster to bring into production but do tend to be higher cost than their brine counterparts. Spodumene is the key lithium bearing mineral and in its pure form contains ~8% Li 2 O. Lithium Mine Supply in 2014, estimated at ~160kt Source: Albemarle It is very interesting to note that spodumene represented ~39% of lithium mine supply in But it is even more interesting to note that Talison (the Greenbushes mine in WA) represented almost 80% of spodumene supply! The spodumene market will be the one PLS will need to break into and we believe end users will be very keen to engage with any potential new producers. 1 1

12 It is clear from the lithium cost curve below (from 2013), that the brine players occupy the bottom half of the cost curve while the hard-rock producers sit in the top half. That said, while Pilgangoora is an aspiring hard-rock producer, we forecast potential EBITDA margins at current prices at very healthy ~50-60%. Lithium Cost Curve in 2013 on a Lithium Carbonate Equivalent (LCE) Basis Source: Roskill estimates 2013 Lithium Mine Supply in 2014: ~85% controlled by 4 players Talison The Greenbushes mine in WA. Acquired by Chinese group Tianqi in 2013 for C$847m who sold 49% to Rockwood in 2014 for $475m. Rockwood was acquired by Albemarle in Albemarle A large US-based specialty metals company with lithium assets around the world. Listed in the NYSE with a market cap of ~US$5.7bn. SQM A large Chile-based specialty metals company, with interests in fertilisers, iodine, lithium etc. Listed on the NYSE with a market cap of ~US$4.5bn. Source: Albemarle FMC Another large NYSE listed chemicals company with a market cap of ~US$5bn. Lithium is a relatively modest percentage of its business. 1 2

13 LITHIUM DEMAND Lithium supply in 2015 is around kt and given the strong rally in the lithium carbonate price this year (see p18), we believe demand is somewhat higher than this. The pie chart below provides a breakdown of lithium demand by end use in 2014: Lithium Demand by Market in 2014 One of Pilbara Mineral s potential target markets it the glass & ceramic market, which in 2014 represented a material 35% of lithium demand. (14%+12%+9%) Source: Roskill estimates 2014 The key growth market for lithium is batteries. While batteries only represented 29% of lithium demand in 2014, a number of market participants believe we are on the cusp of an explosion in lithium battery demand, driven by accelerating adoption rates in two key end uses: - electric and hybrid cars - static energy storage for both home and grid balancing In both cases, the mainstream adoption of these technologies has been driven by considerable technology advances, falling costs and an increasing focus on environmental concerns. As a result, both technologies are being increasingly supported by government policies and incentives to encourage adoption. The Tesla Powerwall Telsa s 2016 production of its lithium-based Powerwall sold out in August 2015 Source: Tesla 1 3

14 LITHIUM BATTERY DEMAND THE KEY DRIVER Over the last ~15 years, lithium batteries have established themselves the go-to technology for energy storage for several key reasons: - double the energy density of the closest alternative - higher voltage - lower discharge rates - no memory effect Breakdown of battery production by type Source: Christophe Pillot, Avicenne Report 2015 As the lithium battery has been adopted by the mainstream, the technology has improved and cost have been falling 14% p.a. for the last 15 years (see chart below). Most industry experts believe the trend of falling costs is likely to continue for at least the next 10 years as very large scale lithium battery plants are constructed (see p17). The falling cost of lithium batteries Lithium batteries were first produced commercially by Sony in years ago lithium batteries were only a small component of the battery market but today they are the dominant technology. Given the lead time it took lithium batteries to become established, we believe lithium batteries could be the dominant technology for the next years. Importantly, the cost of lithium itself only represents ~2% of the cost of a lithium battery. Thus battery manufacturers could potentially withstand significant lithium price increases without much of an impact on the overall battery cost. Source: Nature Climate Change,

15 LITHIUM BATTERY DEMAND ELECTRIC CARS & GRID STORAGE A number of market participants are forecasting superior growth rates in electric and hybrid cars and static energy storage: Lithium Volume Requirements by End Use and Projected Growth Rates Source: Albemarle, Blue Ocean Equities (red circle) Note: HEV=Hybrid Electric Vehicle, PHEV=Plugin Hybrid Electric Vehicle, BEV=Battery Electric Vehicle There are a number key points to note from the picture above: - Firstly, the strong predicted growth rates in electric and hybrid cars and static storage (circled in red) - Secondly, the materially larger volume requirements of these end uses: o 1 electric car (PHEV or BEV) = 10,000 smart phones (60kg vs. 6g) o 1 650MW static power battery = 250,000 smart phones (1.5t vs. 6g) Thus is would only take a relatively modest increase in demand in these larger volume end uses to have a pretty major impact on lithium demand! 1 5

16 One global investment bank recently made some very bullish predictions about the adoption rate of electric vehicles over the next ~10 years and the potential knock on impact for lithium demand 4 : - The market penetration of electric vehicles will grow to 22% by 2025 [from <3%] - Every 1% increase in market penetration of battery electric vehicles would increase lithium demand by ~70kt of LCE [Which would require a 39-44% increase in current supply of kt!] - Lithium demand for all EV applications could grow more than 11x by 2025 In our view these numbers are quite staggering. While these adoption rates may turn out to be too aggressive, in reality even if they are half right the potential knock on increases in lithium demand are likely to be substantial, and in our view could easily outstrip lithium supply. Thus, in our view the outlook for lithium prices appears very robust. For the more sceptical investors out there, the charts below demonstrate that over the last 5- years the adoption rates for electric and hybrid car have been very impressive. In our view, if these growth rates were to simply continue (rather than accelerate) the tipping point for the mainstream adoption of electric vehicles could still be just around the corner. Electric Vehicle Sales (US) Impressive growth rates over last 5 years Source: Albemarle Note: PHEV=Plugin Hybrid Electric Vehicle, EV= Electric Vehicle, HEV=Hybrid Electric Vehicle Do NOT forget about demand for grid power applications While most industry reports seem to focus on electric vehicles being the key driver of lithium battery demand, we believe the potential demand for grid applications (backup power, load shifting, solar self-consumption etc) has the potential to dwarf the demand from electric vehicles given the volumes of lithium required in these applications

17 LITHIUM BATTERY PRODUCTION CAPACITY TO TRIPLE BY 2020 While most lithium investors have probably seen the chart below (many times), we believe it does represents an important part of the equation a number of very large companies are building very large lithium battery factories to position themselves for the step up in demand. Tesla s Gigafactory began producing energy products early (in Q3 CY15) and in its Q3 Shareholder Letter, Tesla confirmed: we are seeing very strong demand for Tesla Energy products globally we have accelerated our plans to expand manufacturing capacity Lithium Battery Production Capacity Expected to Triple over the next ~5 years Source: Benchmark Mineral Intelligence LG Chem, a Korean battery manufacturer, is constructing a plant in Nanjing, China with annual production capacity of more than 100,000 electric vehicles. It will supply batteries to Chinese automakers. Tesla, in partnership with Panasonic, is building a 35Gwh facility in Nevada and expects to begin battery cell production in 2017 and reach full capacity by producing more lithium ion batteries annually than were produced worldwide in Foxconn, a Taiwanese iphone manufacturer, has also announced plans to invest $814m in building a gigafactory China and to become a major player in the Chinese electric car market. Boston Power is a developer and manufacturer of Li-ion batteries. It has R&D facilities in the US and China and manufacturing facilities in China. Boston Power recently received funding from local Chinese governments to substantially expand its existing battery manufacturing facilities in China. Build Your Dreams (BYD) is a Chinese automaker. BYD currently has about 6GWh of capacity, with plans to significantly increase capacity via factories in both China and Brazil. Source: Orocobre Investor Presentation 1 7

18 LITHIUM PRICES Lithium is not a publicly traded commodity and given the relatively small number of players involved, the market remains somewhat opaque. The chart below provides the recent history of the lithium carbonate price: Source: Asian Metals But Pilbara Minerals will not be producing a lithium carbonate, but rather an intermediate product known as a lithium concentrate (spodumene). While we were unable to obtain the lithium concentrate prices for the last 12 months, we have been told that historically, the lithium concentrate price has traded on a 57-59% discount to the lithium carbonate price. The following worked example illustrates the conversion calculation: - Let s say the prevailing lithium carbonate price is US$8,600/t - Applying a 58% discount gives a lithium concentrate price of US$3,612/t LCE - Dividing by 8 gives a lithium concentrate price of US$451/t conc (a useful rule of thumb: 8t of 6% lithium concentrate makes 1t of lithium carbonate) If the prevailing lithium carbonate price is closer the US$10,000/t, following the same calculation as the worked example above, the lithium concentrate price should be ~US$525/t. But anecdotally the latest lithium concentrate price we have heard is US$450/t (perhaps there is a lag for lithium concentrate pricing?) But Tianqi is reportedly increasing the price of its Greenbushes spodumene concentrate by 20% in Assuming this is correct, it sounds to us like the lithium concentrate price (spodumene) is rallying in tandem with the lithium carbonate price. 5 General Mining (ASX:GMM) Investor Presentation, Dec

19 TANTALUM MARKET AN IMPORTANT NOTE Tantalum is a rare, hard, blue-grey, lustrous transition metal that is highly corrosion-resistant. Its primary end use in electrical components, particularly capacitors. Because it is inert, it is also used in laboratory equipment, medical implants and as a substitute for platinum. The Tantalum market is very small with annual production of around 1,300 tonnes. According to this chart, over the past few months the tantalum price has fallen 35% from US$178/kg to US$132/kg (or ~US$60/lb). We assume a flat tantalum price of US$55/lb for our valuation of PLS. This price is for a 20% tantalum concentrate (i.e. post refining) compared to PLS s product which is a 5% tantalum concentrate. Source: InfoMine.com The two main buyers of tantalum concentrates globally are HC Stark and Global Advanced Metals (GAM). GAM is Pilbara Minerals tantalum offtake partner both for Tabba Tabba and Pilgangoora. On our forecasts, Pilgangoora will produce ~135t of tantalum in concentrate from Pilgangoora or a significant ~10% of the 1,300t market. We do see a risk that this new production source could weigh on the tantalum price when Pilgangoora moves into production. Important note: While the tantalum price will have a direct impact on Pilbara Minerals cash flow over the next ~15-18 months as Tabba Tabba moves into production, our valuation for Pilbara Minerals is relatively insensitive to the tantalum price given: - the modest size of Tabba Tabba (only 1c in our 40c NAV) - the fact tantalum only represents 8% of our forecast revenue at Pilgangoora (92% from lithium). i.e. Once Pilgangoora is at full production, on our forecasts, a 10% drop in the tantalum price would lead to only a 2% drop in earnings 1 9

20 ASX LISTED LITHIUM EXPOSURES While the outlook for lithium appears to be very robust, there remains relatively few ASX-listed lithium exposures of sufficient size and liquidity for most institutional investors. In addition, the space is highly fractured and Pilbara Minerals is the one of the few ASX-listed lithium exposures which: - Has a large enough market cap and adequate liquidity for most institutional investors - Owns 100% of its flagship lithium asset - Has no corporates or major shareholders with a blocking stake on its register (i.e. it still retains significant corporate appeal) - Has an asset based in a relatively low-risk jurisdiction The primary ASX-listed lithium exposures Company Code FD Mcap (A$m) Lithium Asset(s) Deposit type Location Orocobre ORE 333 Olaroz (66.5%) Brine Argentina Pilbara Minerals PLS 200 Pilgangoora (100%) Hard-rock Western Australia Galaxy Resources GXY 134 Mt Cattlin (50%) Hard-rock Western Australia Sal De Vida (100%) Brine Argentina Neometals NMT 76 Mt Marion (45%) Hard-rock Western Australia General Mining GMM 67 Mt Cattlin (50%) Hard-rock Western Australia Altura Mining AJM 46 Pilgangoora (100%) Hard-rock Western Australia Source: Blue Ocean Equities Pilbara Minerals Pilgangoora spodumene deposit also stacks up well compared to the other ASX-listed companies with spodumene deposits, in terms of both scale and grade. ASX-listed Hard Rock Lithium Exposures (+Greenbushes) Company Hard-rock lithium Resources mine / project mt Li 2 O (%) Talison Greenbushes % Pilbara Minerals Pilgangoora % Neometals Mt Marion % General Mining / Galaxy Mt Cattlin % Altura Mining Pilgangoora % Source: Blue Ocean Equities 1 As at 30 Sept 2012 We believe it s also important to highlight: (1) At a 1% Li 2 O cut-off PLS s current resource is 1.43% Li 2 O (2) PLS has an Exploration Target of % Li 2 O Greenbushes is the largest and highest grade spodumene deposit in the world, and dominates the global supply of spodumene (~80% of supply in 2014, see p11). But Greenbushes has also been mining since ~1985 and we have been told the open pit is now at a depth of more than 300m, and also has increasingly geological complexity with depth 6. Pilbara Minerals Pilgangoora project is already the second largest spodumene deposit in the world and set to increase by over 60% if it can hit its Exploration Target. 6 Behre Dolbear Technical Report (43-101) on Greenbushes, Dec 2012 (p93, 3 rd paragraph). Source: Sedar 2 0

21 INVESTMENT PROPOSITION This section provides an in-depth look at our valuation assumptions for Pilbara Minerals. BASE CASE VALUATION Our valuation of Pilbara Minerals is based on DCF-based approach, with a significant 50% discount applied to account for the early stage of development and to accommodate the development risks which lie ahead. The table below summarises our key assumptions. Base Case Commentary Throughput 2mtpa Our assessment based on the Exploration Target Lithium Head Grade 1.30% Li 2 O Based on the resource grade of 1.28% and Exploration Target of %. Lithium Recovery 68% Our assessment based on recoveries of comparable operations. Metallurgy test-work is underway. Lithium concentrate Opex to port, post tantalum credit ~290ktpa A$267/t conc 20% high-value low-iron lithium conc (6.5%) and 80% a more standard 6.0% lithium conc (see p6) We assume a strip ratio of 3:1, a mining cost of A$4.10/t material, processing cost of A$16/t ore and G&A of A$3/t ore (for A$35/t ore to mine gate). We assume 12.5c/tkm for the 130km to port and Port/Handling costs of A$15/t conc. Royalties 5.0% + 2.5% 5% WA state royalty + 2.5% vendor royalty to GAM Initial mine life ~18 years Based on the mid-point of the Exploration Target of 80-90mt Initial Capex ~A$180m Our assessment based on comparable operations Sustaining capex 3% of capex Based on our assessment and comparable mines Spodumene price US$490/t Based on 80% sales to battery market at US$450/t, 20% sales to glass/ceramic market at US$650/t A$/US$ Exchange Rate Forward curve Essential spot of falling to 0.67 over 5-years Post Tax IRR 53% On our estimates the post-tax IRR of Pilgangoora is a very competitive 53% Un-risked NPV A$716m Based on a DCF-based approach using a 8% nominal discount rate (6% real) Discount applied 50% Given early stage of development Risk Adjusted NPV A$358m Source: Company, Blue Ocean 2 1

22 UPSIDE CASE VALUATION In our Upside Case we assume higher prices and better recoveries on lithium and tantalum. Base Case Upside Case Commentary Lithium Recovery 68% 75% Metallurgy testwork underway Tantalum Recovery 45% 55% Metallurgy testwork underway Lithium concentrate ~290kt ~320ktpa Due to higher recoveries Tantalum in conc 298klb 364klb Tantalum price US$55/lb US$70/lb Based on a head grade of 150ppm (vs. the resource grade of 216ppm) Based on a 20% Tantalum conc. We assume PLS produces a 5% conc which attracts 20% discount. Low-iron spodumene price (6.5% Li 2 O) US$650/t US$700/t A high-value product for the glass and ceramic market Tianqi is reportedly increasing the price of its Greenbushes spodumene Standard spodumene price (6.0% Li 2 O) US$450/t US$500/t concentrate by 20% in , which we believe could put the price for a standard 6% spodumene as high as ~US$540/t Average Spodumene price US$490/t US$540/t Post Tax IRR 53% 83% Un-risked NPV A$716m A$1,228m Based on a DCF-based approach using a 8% nominal discount rate (6% real) Source: Company, Blue Ocean FUNDING ASSUMPTIONS In our Base Case we assume the company develops Pilgangoora using traditional project finance with 60% debt and 40% equity in the December half We assume new equity is issued at a 10% discount to today s price. In reality, by the time the company comes to funding project development, we expect the share price to be considerably higher, resulting in less dilution. Our other key assumptions are presented below: Funding Uses A$m Funding Sources A$m Initial capex 180 Debt 60% 120 Working capital 20 Equity 40% 80 Total 200 Total 200 Source: Company, Blue Ocean 7 General Mining (ASX:GMM) Investor Presentation, Dec

23 PRICE TARGET & RATING Our $0.40 price target represents ~1.0x our 50% risk-adjusted NAV and an implied return of 82%. STRATEGIC TARGET We derive our longer-term $1.00 Strategic Target for Pilbara Minerals using the Upside Case valuation outlined on p22 and removing the 50% discount we have applied given the early stage of the project. It is important to note here that our Strategic Target should be no means be regarded as the maximum potential value for Pilbara Minerals. In fact, a number of market participants are forecasting strong demand growth for lithium which could lead to meaningful supply shortages and higher lithium prices. NEAR-TERM CATALYSTS The key near-term catalysts for Pilbara Minerals are: (1) Jan 2016: Resource upgrade due. Exploration Target 80-90mt at % Li 2 O (2) Feb 2016: Pre-Feasibility Study due for Pilgangoora (3) July 2016: Definitive Feasibility Study due for Pilgangoora KEY RISKS Pilbara Minerals is exposed to all the normal risks associated with developing and operating mining projects, including permitting, funding and construction risk. Given the early stage nature of the Pilgangoora project, other key risks for Pilbara Minerals include metallurgical recoveries as well as a successful infill drilling program to confirm ore bodies are sufficiently continuous to support a viable mining operation. Many investors may also expect ongoing exploration success (and in our view that is likely) and thus Pilbara Minerals also carries exploration risk. Assuming the company makes the transition into production, the company s revenues will be derived from the sale of lithium concentrate (spodumene) and tantalum. Fluctuations in the lithium concentrate and tantalum price as well as the Australian dollar could impact the company s cash flow, profitability and share price. Pilbara Minerals shares also carry embedded Australian sovereign risk as the company s projects are based in Western Australia. 2 3

24 MODEL SUMMARY FINANCIALS & VALUATION Stock Details Enterprise Value $194m Recommendation: BUY Diluted MCap $200m Target $0.40 Share Price $0.22 Strategic Target (ST) $1.00 Diluted Shares 908m NAV $ Week High $0.41 Implied Return to ST 355% Free Float 100% Implied Return 82% 52 Week Low $0.03 Avg Daily Value $0.86m Macro Assumptions FY16E FY17E FY18E FY19E FY20E Ratio Analysis FY16E FY17E FY18E FY19E FY20E Exchange Rate (A$/US$) Diluted Shares m ,386 1,386 1,386 Avg Li Conc Price (US$/t)* EPS - Diluted Ac (0.7) (0.6) (0.2) Tantalum Price (US$/lb) P/E x n.m. n.m. n.m. 5.9x 3.9x CFPS - Diluted Ac (0.1) Avg Li Conc Price (A$/t) P/CF x n.m. 79.0x n.m. 3.5x 3.2x Tantalum Price (A$/lb) FCF - Diluted Ac (0.5) 0.0 (9.9) P/FCF x n.m. n.m. n.m. 6.6x 3.4x Profit & Loss (A$m) FY16E FY17E FY18E FY19E FY20E Revenue Dividends Ac Operating Costs (3) (6) - (72) (97) Dividend yield % % Operating Profit Payout Ratio % % Corporate & Other (1) (1) (3) (4) (4) Franking % % Exploration Expense (4) (3) (0) (3) (5) EBITDA (3) (0) (3) Enterprise Value A$m D&A (3) (5) (0) (9) (12) EV/EBITDA x n.m. n.m. n.m. 2.1x 1.0x EBIT (6) (5) (3) ROE % (40%) (16%) (2%) 31% 34% Net Interest Expense (0) (0) 1 (9) (0) ROA % (32%) (15%) (1%) 27% 30% Pre-Tax Profit (6) (5) (2) Tax Expense (22) (34) Net Debt or (Cash) A$m (7) (25) 25 (9) (81) Underlying Profit (6) (5) (2) Gearing (ND/(ND+E)) % n.m. n.m. 18% (6%) (54%) Signficant Items (post tax) Gearing (ND/E) % n.m. n.m. 22% (5%) (35%) Reported Profit (6) (5) (2) Cash Flow (A$m) FY16E FY17E FY18E FY19E FY20E Lithium (Li 2 O) P&P Reserves M&I Resources Inferred Operating Cashflow 1 3 (3) mt % cont(kt) mt % cont(kt) cont(kt) Tax (33) Pilgangoora % Net Interest (0) (0) 1 (9) (0) Total 668 Net Operating Cash Flow 1 2 (2) Exploration (4) (3) (1) (4) (5) Capex (5) (2) (135) (49) (5) Tantalum (Ta 2 O 5 ) P&P Reserves M&I Resources Inferred Acquisitions / Disposals mt ppm cont(mlb) mt ppm cont(mlb) cont(mlb) Other Pilgangoora Net Investing Cash Flow (9) (5) (136) (53) (10) Tabba Tabba , , Equity Issue Borrowing / Repayments (120) - Dividends (13) Earnings Sensitivity FY19E FY20E FY19E FY20E Other A$m A$m % % Net Financing Cash Flow (120) (13) Lithium conc price US$/t +10% % 17% Change in Cash Position (86) 72 Tantalum price US$/lb +10% 2 2 3% 3% FX Adjustments Exchange Rate A$/US$ -10% % 22% Cash Balance Balance Sheet (A$m) FY16E FY17E FY18E FY19E FY20E Valuation Discount Stake A$m A$/sh Cash Pilgangoora (un-risked) 100% Other Current Assets PP&E 2 (0) Pilgangoora (risk-adjusted) 50% 100% Exploration & Development Tabba Tabba 100% Other Non Current Assets Exploration Total Assets Corporate & Other (41) (0.04) Debt Debt (Conv notes) (5.7) (0.01) Other Liabilities Cash Net Assets Risk adjusted NAV * We assume 20% of Li conc production is sold into higher value glass/ceramic market at US$650/t with balance sold into battery market at US$450/t. ** We assume a 20% discount applies to PLS's 5% tantalum conc, as the reported tantalum price applies to a 20% tantalum conc (i.e. post refining) Source: IRESS, Company data, Blue Ocean estimates 2 4

25 MODEL SUMMARY OPERATIONAL INPUTS & FREE CASH FLOW Macro Assumptions FY16E FY17E FY18E FY19E FY20E Exchange Rate A$/US$ Li Conc Price (6.0%) US$/t Li Conc Price (6.5%) US$/t Avg Li Conc Price* US$/t Tantalum Price US$/lb Realised Li Conc Price A$/t Realised Ta Price** A$/lb Operational Summary FY16E FY17E FY18E FY19E FY20E FCF Contribution A$m FY16E FY17E FY18E FY19E FY20E Tabba Tabba Tabba Tabba Ore Milled kt Tantalum Revenue Tantalum Head Grade ppm 1,200 1, Operating Costs Recovery % 70% 70% Operating Margin Tantalum Production klb Sustaining Capex Net Cash Cost A$/lb Sustaining Exploration All-in Sustaining Cost A$/lb Corp Overheads % AISC Margin % 47% 47% All-in Sustaining Margin Pilgangoora Pilgangoora Ore Milled mt Lithium Revenue Lithium Head Grade % % 1.30% Tantalum Revenue Recovery % % 68% Operating Costs (ex credit) Li Conc Produced kt Operating Margin Tantalum Head Grade ppm Recovery % % 45% Tantalum Production klb Sustaining Capex Net Cash Cost (post credit) A$/t conc Sustaining Exploration All-in Sustaining Cost A$/t conc Corp Overheads % AISC Margin % % 58% All-in Sustaining Margin Growth Capex Group Operations A$m FY16E FY17E FY18E FY19E FY20E Revenue All-in Sustaining Cost All-in Sustaining Margin 1 2 (3) Growth Capex Growth Exploration All-in Margin (8) (3) (138) Corporate A$m FY16E FY17E FY18E FY19E FY20E Cash Tax Other Items (0) (0) FCF pre Debt Service (8) (3) (138) Net Interest 0 0 (1) 9 0 Debt Drawdown / (Repayment) (120) - FCF post Debt Service (8) (3) (17) (86) 86 New Equity/Dividends A$m FY16E FY17E FY17E FY18E FY20E Proceeds from Shares/Options Dividends Paid Change in Cash (86) 72 Cash Balance * We assume 20% of Lithium conc production is sold into higher value glass/ceramic market (6.5% Li conc) with balance sold into battery market (6.0% Li conc) ** We assume a 20% discount applies to PLS's 5% tantalum conc, as the reported tantalum price applies to a 20% tantalum conc (i.e. post refining) Source: IRESS, Company data, Blue Ocean estimates 2 5

26 BOARD & MANAGEMENT Tony Leibowitz, Non-Executive Chairman Mr Leibowitz is a Fellow of The Institute of Chartered Accountants in Australia, has over 30 years professional experience and was previously a Senior Partner Corporate Finance and Investment Banking PricewaterhouseCoopers. Ken Brinsden, CEO (from 18 January 2016) Mr Brinsden is a mining engineer with more than 20 years experience in surface and underground mining operations. Mr Brinsden has worked for major mining companies including WMC Resources, Normandy, Central Norseman Gold Corporation, Goldfields and Iluka Resources. Mr Brinsden joined Atlas Iron in May 2006 as Operations Manager and played a key role in driving its Pilbara iron ore growth strategy, which saw it become the fourth largest iron ore producer in Australia. He held the roles of Chief Operating Officer and Chief Development Officer before being appointed as Managing Director in February Mr Brinsden also played a key role in driving the cost-reduction and contractor-collaboration strategies which Atlas implemented in response to the collapse in iron ore prices. Neil Biddle, Executive Director Mr Biddle is a geologist and Corporate Member of the Australasian Institute of Mining and Metallurgy. He has over 30 years professional and management experience in the exploration and mining industry and since 1987 has served on the Board of several ASX listed companies. Mr Biddle was Managing Director of TNG Ltd from , Border Gold NL from and Consolidated Victorian Mines Mr Biddle intends to transition into a non-executive director role on completion of the Pilgangoora Feasibility Study, which is targeted for mid John Young, Technical Director Mr Young is a highly experienced geologist having been engaged on exploration and production projects encompassing gold, uranium and specialty metals. From 2002 to 2006 Mr Young was Exploration Manager for Haddington Resources Limited and was responsible for resource exploration and resource definition for their Bald Hill Tantalum mine. Mr Young s corporate experience has included appointments as CEO of Marenica Energy Limited and CEO and director of Thor Mining PLC. My Young has been the Company s Exploration Manager since June 2014 and a Director since September Robert (Bob) Adamson, Non-Executive Director Mr Adamson's professional career spans 43 years, The first twenty five of which he was employed in a range of technical and managerial positions with international mining houses, and in managerial and board positions with several publically-listed exploration and mining companies. Bob has been operating as an independent mineral industry consultant since Anand Sheth, Marketing Consultant Mr Sheth has a degree in Ceramic Engineering and spent almost 10 years as the Marketing Manager for Talison Minerals (Greenbushes). He subsequently spent almost 5 years as the Sales & Marketing Director for Galaxy Resources. Mr Sheth has extensive relationships with end users of lithium concentrates around the world as well as a detailed understanding of what end users are looking for (i.e. product specifications). 2 6

27 CONTACTS ANALYST Steuart McIntyre Senior Resource Analyst P E [email protected] AUTHORITY Rex Adams Executive Director P E [email protected] CONTACTS David O Halloran Executive Director P E [email protected] Gregg Taylor Senior Industrials Analyst P E [email protected] Adam Stratton Institutional Dealing P E [email protected] Tim Potts Institutional/HNW Dealing P E [email protected] HEAD OFFICE Blue Ocean Equities Pty. Ltd. P E [email protected] Steuart McIntyre Senior Resources Analyst P E [email protected] Neon Shariful Investment Analyst P E [email protected] Doc Cromme Institutional Dealing P E [email protected] L 29 Aurora Place 88 Phillip St Sydney NSW 2000 Australia Philip Pepe Senior Industrials Analyst P E [email protected] Emily Mohan Research Associate P E [email protected] Nic van Vliet Institutional Dealing P E [email protected] AFSL No ABN DISCLAIMER DISCLOSURE This document is a private communication to clients and is not intended for public Blue Ocean Equities Pty Limited, circulation or for the use of any third party, without the prior approval of Blue Ocean its employees, consultants and its Equities Pty Limited. This is general investment advice only and does not constitute associates within the meaning of personal advice to any person. Because this document has been prepared without Chapter 7 of the Corporations Law may consideration of any specific client s financial situation, particular needs and investment receive commissions, underwriting and objectives you should consult your own investment adviser before any investment management fees from transactions decision is made on the basis of this document. involving securities referred to in this While this document is based on information from sources which are considered document, and may from time to time reliable, Blue Ocean Equities Pty Limited has not verified independently the information hold interests in the securities referred to contained in the document and Blue Ocean Equities Limited and its directors, in this document. employees and consultants do not represent, warrant or guarantee, expressly or by Blue Ocean Equities Pty Limited and implication, that the information contained in this document is complete or accurate. associates hold 198,489 shares in Pilbara Nor does Blue Ocean Equities Limited accept any responsibility for updating any Minerals at the date of this report and this advice, views opinions, or recommendations contained in this document or for position may change at any time without correcting any error or omission which may become apparent after the document has notice. been issued. Except insofar as liability under any statute cannot be excluded. Blue Ocean Equities Pty 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. 2 7