LIM s advantages. Action and recommendation

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1 CANADA LIM CN Price (at CLOSE#, 09 Jul 2012) Outperform C$2.55 Volatility index Very High 12-month target C$ month TSR % Valuation - DCF (WACC 8.0%) C$ 8.00 GICS sector Materials Market cap C$m day avg turnover C$m 0.6 Number shares on issue m Investment fundamentals Year end 31 Mar 2012A 2013E 2014E 2015E Revenue m EBITDA m Recurring profit m Reported profit m Gross cashflow m CFPS C$ CFPS growth % nmf PGCFPS x EPS rec C$ EPS rec growth % nmf PER rec x nmf Source: FactSet, Macquarie Research, July 2012 (all figures in CAD unless noted) Analyst(s) Daniel Greenspan [email protected] 11 July 2012 Macquarie Capital Markets Canada Ltd. A Canadian iron ore production story DSO production in the Labrador Trough. (LIM) is a Canadian-based iron ore producer with 20 direct shipping (DSO) iron ore deposits located in the Labrador Trough in both the provinces of Quebec and Newfoundland & Labrador. LIM offers investors a unique opportunity, as the only junior iron ore producer in the Trough and we believe the company is well positioned to take advantage of our outlook for strong iron ore prices over the medium to long term. LIM s advantages Ramping up to 5mtpa in 2015 from 2mt this year. First production from the Stage 1 James deposit and the Silver Yards processing facility was achieved in 2H11 and seasonal operations for 2012 started in April. LIM is targeting 2mt of saleable production this year, made up of direct rail, lump, sinter, and ultra fines products. Production is expected to increase to 5mtpa by 2015 with the addition of the Stage 2 Houston project. Access to infrastructure. LIM has a short rail spur (<10km) linking its Silver Yards plant to the rail head in Schefferville, where the company is transporting iron ore production down two common carrier railways to the port at Sept Iles. At the port, LIM is shipping via an agreement to sell all its iron ore production in 2012 to the Iron Ore Company of Canada (IOC). We expect IOC to sell LIM s production at spot prices for delivery to Asian markets, utilizing cape size vessels. Longer term we expect LIM to target access at the planned multi-user port facility at Sept Iles. Exploration upside. LIM has budgeted C$8.6m for exploration this year, focusing on the Houston deposit in Labrador and the Malcolm 1 deposit in Quebec. The Malcolm drilling is a follow-up to the 2011 program, which encountered hard blue hematite ore with a large proportion of lump ore. This year LIM has also planned a bulk sample and resource definition program on historical IOC stockpiles and an initial program on recently identified taconite targets on the company s claims. Favourable valuation. LIM is trading at a discount of 68% to our NAV 8% of C$8.00/sh. In comparison, Champion is also trading at a 67% discount to NAV while Alderon is trading at a 44% discount to NAV. Given that LIM is in production compared to a peer group that is not, we believe LIM s discount to NAV should be smaller. On a P/CF basis, the stock is trading at 7.5x our FY2013 CFPS estimate of C$0.34 and at a modest 2.6x next year s CFPS estimate of C$0.97. Action and recommendation We are initiating coverage of with an Outperform rating and C$6.00 target. Our target reflects a discount of 25% to our NAV 8% estimate of C$8.00/sh. Given that iron ore remains the bulk commodity most levered to China, we see potential for the stock to re-rate with further policy easing and stronger Chinese growth in 2H12 and LIM is distinct from the other Labrador Trough companies in that it is the only junior company in production and has minimal financing risk with C$71m in cash and only C$1.7m in debt as of March We believe the growing production profile and the exploration upside, combined with the strong outlook for iron ore makes LIM an attractive early-stage Canadian producer. Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of this document, or on our website

2 Inside A Canadian iron ore production story 3 Valuation and recommendation 6 DSO projects 9 Appendix 1 Management and Directors 20 Appendix 2 Iron Ore outlook 22 Fig 1 $16.00 $14.00 $12.00 $10.00 LIM CN Two-year share price performance $8.00 $6.00 $4.00 $2.00 $ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/2012 Source: Bloomberg, Macquarie Research, July 2012 Fig 2 Location of projects in the Labrador Trough Source: Company reports, Macquarie Research, July July

3 A Canadian iron ore production story Company profile Iron ore producer in the Labrador Trough. (LIM) is a Canadian-based iron ore producer with 20 direct shipping (DSO) iron ore deposits located in the Labrador Trough in both the provinces of Quebec and Newfoundland & Labrador. First production from the Stage 1 James deposit and Silver Yards processing facility was achieved in 2H11 and seasonal operations for 2012 started in April. The company is targeting 2mt of saleable iron ore production this year, made up of lump, sinter and direct rail iron ore products. Production is expected to ramp up to 5mtpa by 2015 with the addition of the Stage 2 Houston project, which is scheduled to begin operations in 2H13. Fig 3 Production and financial forecasts FY2011A FY2012A FY2013E FY2014E FY2015E FY2016E FY2017E FY2018E Iron ore lump price (US$/t, 100% basis)* $248 $263 $261 $276 $256 $248 $231 $194 Iron ore fines price (US$/t, 100% basis)* $219 $244 $246 $256 $236 $228 $211 $174 Iron ore pellet feed price (US$/t, 100% basis)* $250 $227 $232 $243 $226 $218 $203 $168 Realized lump price (US$/t) - - $120 $129 $117 $142 $132 $108 Realized sinter price (US$/t) - - $111 $117 $105 $130 $119 $96 Realized pellet price (US$/t) - - $107 $114 $103 $128 $119 $97 Realized direct rail ore price (US$/t) - - $85 $97 $88 $114 $105 $87 Lump production (000 tonnes) Sinter production (000 tonnes) ,433 1,941 2,547 2,547 2,547 Pellet feed production (000 tonnes) Direct rail production (000 tonnes) ,056 1,362 1,362 1,362 Total saleable production (000 tonnes) ,864 2,847 3,828 5,000 5,000 5,000 Operating cash costs (US$/t of concentrate) - - $78.32 $71.95 $67.98 $61.49 $61.49 $61.49 Total cash costs (US$/t of concentrate)** - - $ $ $97.98 $61.49 $61.49 $61.49 Capital spending (US$ 000) $26,635 $125,570 $100,000 $82,500 $7,500 $82,500 $82,500 $7,500 Revenue (C$ 000) - - $181,034 $296,182 $370,642 $614,928 $581,294 $474,178 Operating costs (C$ 000) - - $127,673 $178,331 $234,697 $280,440 $287,665 $288,392 Operating margin (%) % 39.8% 36.7% 54.4% 50.5% 39.2% EBITDA (C$ 000) ($4,944) ($15,404) $29,330 $89,965 $105,826 $297,040 $257,190 $152,561 Net income (C$ 000) ($3,972) ($14,672) $10,508 $49,348 $57,363 $186,173 $159,179 $85,886 Cash flow from operations (C$ 000) ($3,531) ($13,629) $23,908 $68,280 $80,706 $216,716 $190,470 $117,252 Basic EPS (C$) ($0.09) ($0.27) $0.16 $0.73 $0.85 $2.76 $2.36 $1.27 FD EPS (C$) ($0.09) ($0.27) $0.15 $0.70 $0.81 $2.64 $2.25 $1.22 Basic CFPS (C$) ($0.08) ($0.25) $0.35 $1.01 $1.20 $3.22 $2.83 $1.74 FD CFPS (C$) ($0.08) ($0.25) $0.34 $0.97 $1.14 $3.07 $2.70 $1.66 *Lump and fines prices are FOB Queensland on a 100% Fe basis. Pellet feed price is FOB Brazil on a 100% Fe basis **Total costs include marketing and selling costs paid to IOC Source: Macquarie Research, July July

4 Investment positives Located in the well established Labrador Trough. LIM s DSO projects are located in the Labrador Trough, a well established iron ore production and development region in Canada. There are currently five open-pit iron ore mines operating in the area and a number of projects in various stages of development. In production well positioned to take advantage of strong iron ore prices. LIM is one of the few ways for investors to get exposure to iron ore production in Canada. The company is well positioned to take advantage of our outlook for strong iron ore prices over the medium to long term. Growing production profile. First production from the Stage 1 James deposit and Silver Yards processing facility was achieved in 2H11 and production this year is expected to reach 2mt. We expect a steady ramp-up in production to 5mtpa by 2015 as production from the Stage 2 Houston deposit is targeted to start in 2H13. Location relative to rail. LIM has a short rail spur (<10km) to link its Silver Yards plant to the rail head in Schefferville, where the company is utilizing two connected railways to transport its iron ore production to the port at Sept Iles. The first leg of the rail between Schefferville and Emeril Junction is ~235km long and is owned by Tshiuetin Rail Transportation Inc (TSH), a private company controlled by a consortium of three First Nations. TSH connects to the Iron Ore Company of Canada s (IOC) Quebec North Shore & Labrador railway (QNS&L) for the remaining 360km trip to the port at Sept Iles. Both railways are considered to be common carriers. LIM has a life-of-mine contract in place with IOC for access on the QNS&L and currently signs annual service contracts for access on the TSH. Benefits from relationship with IOC. LIM is currently shipping iron ore from the port of Sept Iles via an agreement to sell all of its production in 2012 to IOC. The terms of the contract with IOC are confidential, but we expect LIM s production will be sold at spot prices for delivery to Asian markets, utilizing cape size vessels. Benefits from the relationship with IOC include port and rail access, no discount on the selling price LIM receives, and IOC handling all the marketing and selling logistics. Exploration upside. This year LIM has budgeted C$8.6m for exploration. The focus of the program is the Houston deposit in Labrador and the Malcolm 1 deposit in Quebec. The Malcolm program is a follow-up to successful drilling of 18 holes in 2011, which encountered mainly hard blue hematite ore with a large proportion of lump ore. LIM has a number of other exploration initiatives planned for 2012 including a bulk sample and resource definition program on historical IOC stockpiles of material and an initial program on recently identified taconite targets on the company s claims. LIM is also exploring and carrying out metallurgical testing on historically identified manganese resources to see if the Silver Yards facility is capable of beneficiating the ore. Potential longer-term acquisition target. LIM is the only junior and one of only four companies in production in the Labrador Trough. LIM has a growth profile that is set to more than double production over the next four years to 5mtpa and the stock is trading at a 68% discount to our NAV estimate. LIM owns 100% of its projects and has no offtake agreement in place. In our view, all of these factors make LIM an acquisition target and the most likely scenario would involve IOC, which has a history of operating in the area and a pre-existing relationship with LIM. We believe that if LIM were to be acquired it would likely take place after the new port facility is completed at Sept Iles (scheduled for 2014, we expect 2015) and LIM is no longer beholden to IOC for port space. In the near term, we believe IOC will likely continue to leverage the existing relationship. Favourable valuation. LIM is trading at a discount of 68% to our NAV 8% of C$8.00/sh. In comparison, Champion (CHM CN, C$1.08, Outperform, TP: C$3.00) is also trading at a 67% discount to NAV and Alderon (ADV CN, C$2.36, Outperform, TP: C$4.50) is trading at a 44% discount to NAV. Given that LIM is in production, we believe the NAV discount relative to peers should be smaller. On a P/CF basis, the stock is trading at 7.5x our FY13 CFPS estimate of C$0.34 and at a modest 2.6x our FY14 CFPS estimate of C$ July

5 Investment risks Infrastructure access beyond At Sept Iles, LIM will have to negotiate a deal for port space next year and potentially 2014 as well, depending on the timing for completion of the new multi-user port facility and on LIM gaining access to the new facility. For service on the TSH rail LIM is currently signing annual service contracts, although we expect the company to seek a life-of-mine contract with the railway operators. Port and rail access is a risk until each annual contract is finalized. Relationship with IOC. LIM is limited in terms of port options to ship its iron ore production and is somewhat dependent on access to port space from IOC. While the terms of the sales contract between LIM and IOC are confidential we believe port, marketing and selling costs paid to IOC erode a significant portion of the benefits LIM receives from its relationship with IOC. We expect total operating costs to remain high (~US$100/t) until completion of the multi-user port facility at Sept Iles and LIM is less dependent on IOC. Seasonality adds start-up risk. Mining and milling on site are seasonal. Operations at the James deposit started this year at the beginning of April and are expected to continue until November. The Silver Yards processing plant is expected to run from May through November. The resumption of operations each spring adds seasonal start-up risk. LIM is attempting to mitigate some of this risk by developing dry in-pit crushing and screening for the Stage 2 Houston project, which could extend seasonal mining operations. As well, the company was able to rail lump ore in December 2011, demonstrating that a coarser product can be transported in the winter, effectively extending the operating season. Permitting risk. LIM s DSO projects are made up of a number of smaller deposits. Given that there are 20 projects, LIM has significant ongoing permitting requirements and risks as it continues to develop properties. That said, the company has demonstrated an ability to get projects permitted, most recently with successful completion of the environmental permitting for the Stage 2 Houston deposit. Local political risk. In early July LIM reported that a group of Schefferville residents set up a barricade blocking road access to the mine and mill forcing LIM to temporarily shut down operations on site. While the protest lasted for only five days, it does highlight the risk that local issues and politics can have on operations. The blockade and temporary shutdown of operations are not expected to impact 2012 production and sales guidance. We note that LIM has signed an Impact Benefits Agreement (IBA) with four First Nations groups, including the two local First Nations the Naspaki Nation of Kawawachikamach and the Innu Matimekush- Lac John. Development risk. LIM plans to mine the DSO projects in five overlapping stages utilizing three or four separate beneficiation plants. The company is currently in the process of strategically reviewing all deposits to develop a sequence plan. We currently model Stages 1 to 3 of development and do not yet model any value for longer-term Stages 4 and 5, which would require more significant infrastructure development to bring into production. For Stages 2 and 3, building additional processing facilities, developing infrastructure and preparing the mines for production will result in ongoing development risk for LIM. Financing risk. Based on the current expansion plan and our forecast for production and iron ore prices we estimate a cash shortfall of C$7.9m at the end of FY14. We note that LIM has only C$1.7m in capital lease obligations, leaving plenty of room for a line of credit, which we believe will be needed to meet the current timeline for expansion to 5mtpa. Tightly held stock. Anglesey Mining is the largest shareholder in LIM holding 17.8m shares representing 26% of the company. Management and insiders hold an additional 5% and the company estimates that ~30% of the stock is held by institutions. While the large position controlled by Anglesey likely impacts the liquidity of the stock (average volume is 358k shares per day over the past year), we note that any M&A activity would be carefully considered by a major shareholder and unfriendly takeovers would be difficult to complete. 11 July

6 Valuation and recommendation Growing production profile. Our valuation for LIM is based on a production profile that ramps up from 2mt of iron ore production this year to 5mt by We expect the company to produce four saleable iron products including direct rail ore, lump, sinter fines and a pellet feed (ultra fines). We expect cash costs to fall from a peak of US$78/t this year (not including our estimate for US$30/t marketing and selling costs due to IOC) to US$62/t long term. Valuation based on a 95mt resource. We currently model a resource of 95mt, reflecting Stages 1 to 3 of development. We do not yet model any value for longer-term Stages 4 and 5. We forecast capital spending of US$170m over this year and next to fund the Stage 2 development at the Houston deposit, the Phase 3 expansion at Silver Yards this year and railway upgrades. We also forecast an additional capital spend of US$150m in 2015 and 2016 to fund the Stage 3 expansion at the North Central deposits. We rate the stock as Outperform with a C$6.00 target. At the Macquarie price deck for the various iron ore products expected to be produced, we estimate a NAV of C$8.00/sh based on an 8% discount rate applied to the after-tax cashflows from the DSO projects. We rate the stock as Outperform with a C$6.00 target a discount of 25% to our NAV. Potential for LIM to re-rate with stronger Chinese growth. Given that iron ore remains the commodity most levered to China, we see potential for the stock to re-rate with further policy easing and stronger Chinese growth in 2H12 and LIM is distinct from the other Labrador Trough companies in that it is the only junior company in production and has minimal financing risk with C$71m in cash and only C$1.7m in debt as of 4Q12 (March 2012). Fig 4 NAV estimate NPV 6% NPV 8% NPV 10% NPV 12% Macquarie NAV (C$m) NPV/sh (C$m) NPV/sh (C$m) NPV/sh (C$m) NPV/sh (C$m) NPV/sh DSO projects $546 $7.73 $486 $6.87 $434 $6.15 $390 $5.52 $486 $6.87 Working capital (4Q12) $61 $0.86 $61 $0.86 $61 $0.86 $61 $0.86 $61 $0.86 Long term debt (4Q12) Cash from options and warrants $19 $0.27 $19 $0.27 $19 $0.27 $19 $0.27 $19 $0.27 Total $626 $565 $514 $470 $565 FD shares outstanding NAV/sh (C$) $8.86 $8.00 $7.27 $6.65 $8.00 NAV/sh (US$) $8.71 $7.87 $7.15 $6.53 $7.87 Source: Macquarie Research, July July

7 Fig 5 Assumptions for NAV estimate Assumptions Iron ore prices Macquarie price deck C$/US$ exchange rate Macquarie price deck Reporting currency C$ DSO projects Location Labrador Trough - Labrador & Quebec, Canada Ownership 100.0% Commercial production 2012 Ore mined (000 tpd) Strip ratio 12ktpd in 2012, up to 27ktpd in 2015 and life-of-mine 1.3:1 LOM average Fe grade 56.4% Mill recovery 79.3% Weight recovery 71.6% Concentrate grade 62.5% Lump production Ramp-up from 189kt in 2012 to 545ktpa in 2015 Sinter production Ramp-up from 925kt in 2012 to 2.5mtpa in 2015 Pellet feed production Ramp-up from 100kt in 2012 to 545ktpa in 2015 Direct rail production Ramp-up from 650kt in 2012 to 1.4mtpa in 2015 Cash costs (US$/t, LOM average) $62/t LOM average, $105/t average in 2012 and 2013 including selling and marketing costs Life of mine 18 years Source: Macquarie Research, July 2012 Fig 6 NAV sensitivity to changes in the iron ore price and discount rate Iron ore price -15% -10% -5% Macq deck +5% +10% +15% 6% $1.96 $4.32 $6.71 $8.86 $11.01 $13.11 $15.40 Discount rate (%) 8% $1.95 $4.00 $6.11 $8.00 $9.89 $11.73 $ % $1.92 $3.71 $5.60 $7.27 $8.94 $10.57 $ % $1.88 $3.46 $5.15 $6.65 $8.14 $9.59 $ % $1.79 $3.12 $4.58 $5.86 $7.14 $8.37 $9.75 Source: Macquarie Research, July July

8 Acquisition potential Growing production profile, full ownership, no offtake and discounted valuation make LIM a potential takeover candidate. LIM is the only junior and one of only four companies in production in the Labrador Trough. LIM has a growth profile that is set to more than double production over the next four years to 5mtpa and the stock is trading at a 68% discount to our NAV estimate. LIM owns 100% of its projects and has no offtake agreement in place. We believe these attributes make LIM an attractive takeover candidate. Acquisition more likely after port development at Sept Iles is complete. We believe that the most likely acquisition scenario would involve IOC, which has a history of operating in the area. IOC and LIM have an existing relationship, as IOC currently purchases all production from LIM, transports the iron ore over its QNS&L railway and arranges shipping, marketing and sales agreements. IOC currently produces 17mtpa from its Carol Lake project in the Labrador Trough and has plans to increase production to 26mtpa. An incremental 5mtpa from LIM would add meaningful tonnage to the IOC operations. We believe that if LIM were to be acquired it would be more likely to take place after the new port facility at Sept Iles is completed (scheduled for 2014, we expect 2015) and LIM is no longer beholden to IOC for port space. In the near term, we believe IOC will likely continue to leverage the existing relationship. 11 July

9 DSO projects Location The DSO projects are located in the central portion of the Labrador Trough, near the town of Schefferville, Quebec and approximately 590km north of the port of Sept Iles by rail. The DSO projects are located in both Quebec and Labrador, although most of the Stage 1 and 2 deposits expected to be mined in the earlier years of production are located in Labrador. Fig 7 Location of DSO projects Source: Macquarie Research, July 2012 Resources Stage 2 Houston deposit is the largest contributor to the compliant resource. LIM s DSO projects were part of IOC s Schefferville holdings, which were mined from the mid-1950s to the mid-1980s. As a result of the long history on the property, the majority of the resource base is not compliant. The compliant resource is a modest 44.6m tonnes in the Measured and Indicated categories, grading 56.4% Fe scattered across five deposits all within Stage 1 and 2 of the potential five-stage development schedule. The largest contributor to the compliant resource is the Stage 2 Houston deposit, which has 22.9m tonnes in the Measured and Indicated categories, grading 57.2% Fe. LIM estimates an additional historical (non-compliant) resource of 121m tonnes, bringing the global non-compliant resource of the DSO projects to ~166m tonnes grading ~57% Fe. 11 July

10 Fig 8 Resource estimate for the DSO projects Tonnes Grade Contained iron Property Category (000) (% Fe) (000 tonnes) James Indicated 6, % 3,829 Inferred % 55 Redmond 2B Indicated % 509 Inferred % 17 Redmond 5 Indicated 2, % 1,146 Inferred % 41 Knob Lake - Fe Measured 2, % 1,561 Indicated 2, % 1,229 Inferred % 379 Knob Lake - Mn Measured % 193 Indicated % 114 Inferred % 73 Houston - Fe Measured 18, % 10,718 Indicated 3, % 1,947 Inferred 3, % 2,111 Houston - Mn Measured % 352 Indicated % 74 Inferred % 2 Denault Measured 4, % 2,455 Indicated 1, % 1,045 Inferred % 199 Total Measured 26, % 15,269 Indicated 17, % 9,894 Measured & Indicated 44, % 25,163 Source: Company reports, Macquarie Research, July 2012 Inferred 5, % 2,875 Exploration During 2011, LIM completed 11k metres of drilling at its projects in both Labrador and Quebec. The objectives of the 2011 program were to expand the Houston deposit in support of Stage 2 development and to test other smaller deposits located close to the existing Silver Yards facility, which could become feeder deposits in the future. Focus for exploration in 2012 is on Houston and Malcolm. In 2012, the company has budgeted C$8.6m for exploration. The focus of the program this year is the Houston deposit in Labrador and the Malcolm 1 deposit in Quebec. The Malcolm program is a follow-up to successful drilling of 18 holes in 2011, which encountered mainly hard blue hematite ore with a large proportion of lump ore. Other exploration initiatives also ongoing. In addition to the Houston and Malcolm drilling, LIM has a number of other exploration initiatives planned for The company is proceeding with a bulk sample and resource definition program on historical IOC stockpiles, which could provide three to four years of feed to the Silver Yards plant, if test-work shows the ability to beneficiate the ore. LIM is also planning an initial program on recently identified taconite targets on the company s claims and is exploring and carrying out metallurgical testing on historically identified manganese resources nearby to see if the Silver Yards facility is capable of beneficiating the manganese ore. 11 July

11 Fig exploration targets Source: Company reports, Macquarie Research, July 2012 Geology The LIM deposits are composed of Lake Superior-type iron formations, consisting of banded sedimentary rocks composed principally of bands of iron oxides, magnetite and hematite within quartz (chert)-rich rock, with variable amounts of silicate, carbonate and sulphide lithofacies. Tightly folded and faulted iron formation. The Schefferville area of the Trough, known also as the Knob Lake Iron Range, consists of tightly folded and faulted iron formation exposed along the height of land that forms the border between Quebec and Labrador. The iron deposits, within the Sokoman iron formation, are a residually enriched type of deposit that formed after two periods of intense folding and faulting, followed by the circulation of meteoric waters in the fractured rocks. The enrichment process was mostly caused by leaching and the loss of silica, which resulted in a strong increase in porosity, producing a friable, granular and earthy textured iron ore. The siderite and silica minerals were altered to hydrated oxides of goethite and limonite, while the second stage of enrichment included the addition of secondary iron and manganese that appear to have moved in solution and filled pore spaces with limonite-goethite. 11 July

12 Production and development outlook LIM plans to mine the DSO projects in five overlapping stages of production utilizing three or four separate beneficiation plants. The company is currently in the process of strategically reviewing all deposits to develop a sequence plan. Central Zone is the focus for now. The deposits in Stages 1 to 3 are all located in the Central Zone of LIM s property package. The company expects the Central Zone deposits to sustain mining operations for +20 years. Stage 1 production is mostly scheduled to come from the James deposit, Stage 2 operations are expected to centre on the Houston deposit, while Stage 3 production is expected to come from the north-central Howse deposit. Fig 10 Map of staged mining Source: Company reports, Macquarie Research, July 2012 Expected operating parameters Seasonal mining operations. LIM is currently in Stage 1 of production at its DSO projects, with mining started at the James deposit in 2H11. Mining on site is seasonal and operations began this year at the beginning of April and are expected to continue until November. The deposit is mined with conventional open-pit truck and shovel methods. We note that only 25% of the James deposit is expected to require blasting to break the ore. The remaining 75% of the deposit is expected to be mined by free digging. LIM plans to mine at a rate of 15ktpd in July

13 Fig 11 Photo of James deposit mining operations Source: Macquarie Research, July 2012 Ramping up the Silver Yards processing facility. At the Silver Yards facility Stage 1 of production involves a three-phase ramp-up at the mill, of which the first two phases are complete. Phase 1 consisted of primary and secondary crushing, washing and sizing and was completed in June Phase 2 included a fines recovery area with de-sliming cyclones, density separation and filtration to produce a sinter fines product and was completed in October The third phase of the ramp-up is expected to be completed in August 2012 and take throughput at the mill to 12ktpd with the addition of secondary de-sliming, magnetic separation and vacuum filtration to produce an ultra fines (pellet feed) product. The 12ktpd throughput targeted with the phase 3 expansion is an increase from 8ktpd achieved in late LIM has guided for production of 2mt of saleable iron ore products in July

14 Fig 12 Photo of Silver Yards processing facility Source: Macquarie Research, July 2012 Fig 13 Photo of the phase 3 expansion construction at Silver Yards Source: Macquarie Research, July July

15 Production expected to grow by 50% to 3mt next year. Stage 2 production from the Houston deposit, located in the South Central Zone, is targeted for start-up in 2H13 (FY14). We expect LIM to construct a new plant to process Houston ore that will cost US$75m, compared to company guidance of C$60m. We believe capex for the plant will be funded with cashflow from Stage 1 operations, cash on hand and debt financing. Production is forecast to grow to 3mt next year and ultimately to 5mtpa by 2015 (FY2016). Longer term, we expect Stage 3 production to include a third mill and process ore mainly from the Howse deposit located in the North Central zone. Expect high costs in the near term, but should fall longer term as production ramps up and with the new port facility. We expect costs to be high this year as operations ramp up. The company has provided guidance of US$60 65/t of iron ore produced and delivered to port. We expect port, marketing and selling costs to be US$40/t (US$10/t for port and US$30/t for marketing and selling) and are forecasting total operating costs of US$108/t for the year. We expect total operating costs to remain high next year at US$102/t due to port, marketing and selling costs, which are expected to stay unchanged YoY, as LIM remains dependent on IOC for shipping. Starting in 2015 (FY16) and continuing long term, we expect costs to fall to US$62/t, reflecting the ramp-up in operations to full capacity and our expectation that LIM will negotiate access at the new port facility at Sept Iles. Fig 14 Annual expected operating and cost parameters for DSO project FY2012A FY2013E FY2014E FY2015E FY2016E FY2017E FY2018E Production estimates Ore mined 000 tpd Ore mined 000 tpa 1,205 2,780 4,040 4,896 6,402 6,402 6,402 Ore milled 000 tpd Ore milled 000 tpa 572 1,935 2,835 3,840 5,040 5,040 5,040 Head grade Fe % 58.4% 56.4% 56.4% 56.4% 56.4% 56.4% 56.4% Mill recovery % % 80.0% 80.0% 80.0% 80.0% 80.0% Weight recovery % 40.6% 60.2% 72.2% 72.2% 72.2% 72.2% 72.2% Concentrate grade % 64.8% 62.5% 62.5% 62.5% 62.5% 62.5% 62.5% Lump production 000 tpa Sinter production 000 tpa ,433 1,941 2,547 2,547 2,547 Pellet feed production 000 tpa Direct rail production 000 tpa ,056 1,362 1,362 1,362 Total saleable production 000 tpa 671 1,864 2,847 3,828 5,000 5,000 5,000 Costs estimates Mining US$/t mined - $5.33 $4.50 $4.00 $3.50 $3.50 $3.50 Mining US$/t of con - $18.32 $14.95 $11.98 $10.49 $10.49 $10.49 Milling US$/t of con - $17.00 $15.00 $14.00 $14.00 $14.00 $14.00 G&A US$/t of con - $8.00 $7.00 $7.00 $6.00 $6.00 $6.00 Rail US$/t of con - $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 Port US$/t of con - $10.00 $10.00 $10.00 $6.00 $6.00 $6.00 Marketing and selling US$/t of con $30.00 $30.00 $ Total cash costs US$/t of con - $ $ $97.98 $61.49 $61.49 $61.49 Capital spending US$ m $125.6 $100.0 $82.5 $7.5 $82.5 $82.5 $7.5 Source: Company data, Macquarie Research, July July

16 Fig 15 DSO project NPV estimates Discount rate C$m NPV/sh 0% $807 $ % $546 $7.73 8% $486 $ % $434 $ % $390 $ % $335 $4.74 Source: Macquarie Research, July 2012 Fig 16 DSO project NPV sensitivity to changes in the iron ore price and discount rate Iron ore price -15% -10% -5% Macq deck +5% +10% +15% 6% $58.5 $225.6 $394.2 $546.2 $698.0 $846.3 $1,008.0 Discount rate (%) 8% $58.2 $202.8 $352.0 $485.7 $618.9 $748.9 $ % $56.1 $182.5 $315.5 $434.1 $552.1 $667.0 $ % $53.0 $164.4 $283.9 $389.9 $495.2 $597.5 $ % $47.0 $140.7 $243.6 $334.5 $424.4 $511.5 $609.2 Source: Macquarie Research, July 2012 Infrastructure Rail Utilizing two common carrier railways to transport production. LIM is utilizing a short rail spur (<10km) from its Silver Yards plant to connect to the rail head in Schefferville. Once at the rail head, the first leg of transport between Schefferville and Emeril Junction (located near Labrador City) is ~235km down a railway owned by Tshiuetin Rail Transportation Inc (TSH). TSH is a private company controlled by a consortium of three First Nations. The TSH rail connects to the Iron Ore Company of Canada s (IOC) Quebec North Shore & Labrador railway (QNS&L) for the remaining 360km trip to the port at Sept Iles. Both railways are considered to be common carriers, meaning the owners of the rail are obligated to provide suitable levels of service to thirdparty users. Some upgrading of TSH rail may be required. With the QNS&L railway, LIM has a confidential life-of-mine rail transportation agreement in place that addresses fees and tonnage commitments from both LIM and IOC. For service on the TSH rail LIM is currently signing annual service contracts, although we expect the company to seek a life-of-mine contract with the railway operators. We believe both stretches of rail are capable of handling the current and future annual production targets from LIM, although some upgrading of the TSH rail line may be required as production ramps up at LIM and as production from New Millennium s DSO project begins later this year. 11 July

17 Fig 17 Map of rail route to port Source: Company reports, Macquarie Research, July 2012 Targeting one train per day. During 2011 LIM operated one train during the summer season and added a second train in the fall. This year, the company currently has four train sets running and are effectively loading one train per day. The capacity of each train is 10kt, although the company has indicated that it is pushing loads to 11k and 12kt per train. A fifth train set is ready now and is expected to be delivered in July and a sixth set is under construction. Of the four sets operating now, two are owned by LIM and two belong to IOC. We note that only the IOC trains are compatible with the rotary car dumper at the port, while the LIM trains have to be unloaded with shovels. At site, the Silver Yards facility does not have a hopper or conveyer system to load trains as the scale of operations do not justify the capital expense. The rail cars at the mill are loaded by shovel. 11 July

18 Fig 18 Picture of shovels loading a railcar at the Silver Yards mill Source: Macquarie Research, July 2012 Port Annual sales agreement with IOC adds risk. LIM is currently shipping from the port of Sept Iles via an agreement to sell all its iron ore production this year to IOC. The exact terms of the contract with IOC are confidential, but we are forecasting US$40/t for port, marketing and selling costs in We expect LIM s iron ore production will be sold on the spot market for delivery to Asian markets, utilizing cape size vessels. LIM and IOC had a similar agreement in place in 2011 and LIM will have to negotiate a deal for port space next year and potentially 2014 as well, depending on the timing for completion of the new multi-user port facility at Sept Iles and on LIM gaining access to the new facility. Port access going forward is a risk until the new multi-user facility at Sept Iles is complete and LIM negotiates access. Positive steps towards a new port facility at Sept Iles. In February 2012, the federal Government of Canada announced an investment of C$55m to modernize the Port of Sept Iles in Quebec. The funds will be used towards the construction of a new multi-user deep-water dock at the port, which will include two ship loaders and two conveyer lines. The entire project is expected to cost C$220m and is forecast to be completed by the end of March 2014, although we expect the facility to be in operation in We believe LIM will target access at the new facility, which has the potential to materially lower operating costs for the company. We forecast port, marketing and selling costs to decrease from US$40/t in 2012 to US$6/t in 2015 when we expect the port expansion to be complete. Power LIM expects to be connected to the grid in July although likely minimal cost savings. All power on site is currently provided by diesel generators. The company expects to connect to the grid in July and receive power from the Menihek hydro-electric plant located 32km southeast from the Silver Yard facility. Connection to the grid will likely only save a minimal $ /t in operating costs. 11 July

19 Financial LIM finished the March 2012 quarter with C$71.1m in cash and C$1.7m in capital lease obligations. The cash balance reflects an increase from C$21.8m at the end of December 2011 as the company completed an equity financing in the quarter, raising gross proceeds of C$71.6m. The financing included the issuance of 11.5m common shares at C$5.30/sh and 1.75m flowthrough shares at C$6.10/sh and diluted existing shareholders by 24.5%. We expect LIM to generate C$23.9m in cashflow from operations this year and C$68.3m in FY14. Based on the current expansion plan and our forecast for iron ore prices and production, we estimate a cash shortfall of C$7.9m at the end of FY14. We note that LIM has only C$1.7m in capital lease obligations, leaving plenty of room for a line of credit, which we believe will be needed to meet the current timeline for expansion to 5mtpa. We do not model any future dilution to fund the construction of the Stage 2 and the Stage 3 processing facilities. Fig 19 Capital structure and balance sheet summary Capital structure millions Basic shares outstanding 67.4 Warrants outstanding 1.1 Options 2.1 Fully diluted shares outstanding 70.6 Financial parameters (4Q12) Cash (C$m) $71.1 Debt (C$m) - Capital lease obligations (C$m) $1.7 Source: Company reports, Macquarie Research, July July

20 Appendix 1 Management and Directors John F. Kearney Chairman & CEO Mr. Kearney has 40 years of experience in the mining industry. He is Chairman or Director of a number of public companies, including Canadian Zinc Corporation and Anglesey Mining. He is the past President of the Northwest Territories and Nunavut Chamber of Mines, a Director of the Mining Association of Canada, and a member of the Prospectors and Developers Association of Canada, Canadian Institute of Mining and Metallurgy and the Law Society of Ireland. Rod Cooper President & Chief Operating Officer Mr. Cooper was appointed President and Chief Operating Officer in November He is a mining engineer with over 30 years of experience in the resource industry. Prior to joining LIM, Mr. Cooper was Vice President, Senior Mining Analyst at Dundee Securities and was formerly Chief Operating Officer for Baffinland Iron Mines. He also has experience working for Kinross, Homestake Canada, Echo Bay Mines, Inco Metals and TD Bank. Danesh K. Varma CFO Mr. Varma is a chartered accountant with over 20 years of experience in financial management. He is currently a director of Anglesey Mining and of Minco. In addition, Mr. Varma serves as the CFO of Minco, Conquest Resources and Xtierra. Previously, he was President of Westfield Minerals and a director of Northgate Exploration. Aiden Carey Senior Vice President Operations Mr. Carey joined LIM in 2011 after three years with Barrick Gold and before that a number of years in senior operating positions with Wabush Mines and Cliffs Natural Resources in the iron ore industry. Mr. Carey s principal responsibility is to oversee the Schefferville operations, working closely with Transport to ensure the timely delivery of product to market. He will also liaise with the Projects group on current and future expansions. Michel Cormier Vice President, Exploration Mr. Cormier joined LIM in 2012 bringing 38 years of experience in gold and base metals exploration, discoveries, development and mining. He previously held positions with Mundoro Capital and Adamus Resources, gaining expertise in project generation, planning and management of exploration program. Since 2000, Mr. Cormier has acted as a Qualified (Competent) Person in compliance with NI and JORC code. Bill Hooley Director, Vice Chairman Mr. Hooley is currently Chief Executive of Anglesey Mining. He is a professionally qualified mining engineer and has 40 years of experience in the global mineral industry. Terence N. McKillen Director & Executive Vice President Mr. McKillen is a professional geologist and has 40 years of experience in the mining industry. He is currently Director, President and CEO of Xtierra, Conquest Resources and Chief Executive of Minco. He is a registered Professional Geoscientist in the Provinces of Ontario and Newfoundland & Labrador. Richard Lister Director Mr. Lister has over 40 years of experience in the mining, metallurgical and chemical industries. He has served as President and CEO of Zemex Corporation, Vice Chairman of Dundee Bancorp, Chairman and President of Campbell Resources. He was also a Director of Coal Corporation and Anatolia Minerals Development Limited. 11 July

21 Gerald J. Gauthier Director Mr. Gauthier is a mining engineer. Since September 2008 he has been Chief Operating Officer of Xtierra. From August 2005 to June 2008, he was Chief Operating Officer of Nevsun Resources and from December 2002 until April 2004, he was Vice-President, Mining of Glencairn Gold. Prior to 2001 Mr. Gauthier has served as President and CEO of United Keno Hill Mines and prior to 1999 was President, COO Santa Cruz Gold. Matthew Coon Come Director Mr. Matthew Coon Come is Grand Chief of the Crees of Northern Quebec and a Board Member of the Grand Council of the Crees (Eeyou Istchee) and the Cree Regional Authority. He was National Chief of the Assembly of First Nations from 2000 to 2003 and previously was Grand Chief of the Grand Council of the Crees in Quebec for 12 years from 1987 to Earlier he served two terms as Chief of the Mistassini First Nation. Mr. Coon Come is a Founding Member of the Board of Compensation of the Cree Nation and has been a director of Creeco; AirCreebec, Cree Regional Intercompany Enterprise Company and Cree Construction Company and Chairman of Cree Housing Corporation and James Bay Native Development Corporation. He was a founding director of the First Nations Bank of Canada. Eric W. Cunningham Director Mr. Cunningham has been engaged as an independent mining consultant since He has been a director of Aurora Energy Resources since April 2006 and was formerly a director of Viceroy Exploration. Mr. Cunningham was the joint owner of the Golden Kopje Mine in Zimbabwe from 1997 to 2001 and general manager and director of Trillion Resources. He also was Manager of Wright Engineers, and held various positions with Sherritt Gordon Mines. Other members of senior management Neil Steenberg Corporate Secretary Joseph Lanzon Vice President, Government & Corporate Affairs Bernie Maskerine Vice President, Transportation Stephen McGinn Vice President, Human Resources and Health & Safety Richard Pinkerton Vice President, Finance Keren Yun Vice President, Investor Relations & Communications Larry LeDrew Vice President of Sustainable Development Guy Moores General Manager, Schefferville Operations 11 July

22 Appendix 2 Iron Ore outlook Extremely China-levered, very short on near-term supply growth More comfortable with US$150/t over the medium term. Iron ore remains the great polariser of commodity markets, mainly due to its leverage to Chinese steel output and thus Chinese growth expectations. However, from a fundamental standpoint, it remains the most undersupplied, with >400mtpa of ore output coming in above our long-run price level, much from the Chinese private sector. While price cycles will continue to be driven by the directional need for Chinese domestic ore either dropping into the cost curve to push some out of the market or rising to incentivise additional volumes the ongoing requirement for such high volumes in the market makes us more comfortable with a 62%Fe spot price higher than $150/t CFR China rather than below, into the medium term. Longer-term supply growth expected, but won t displace all high-cost Chinese domestic production. We believe persistent supply struggles, coupled with grade degradation at existing assets, highlight the challenges in bringing incremental iron ore supply to market. This is not to say, however, that there is not a supply response coming. With incremental material due on market from the four largest suppliers in 2014, we see 124mt of additional seaborne supply in 2014 as the vast capex spends finally yield a result. However, this is not the story in iron ore we model that this new supply displaces the requirement for only some of the high-cost Chinese domestic material continuously post We continue to believe the prolonged need for considerable volumes of this stop-gap Chinese domestic ore to balance the market is undervalued. Fig 20 Expectations for iron ore seaborne supply growth Growth in seaborne iron ore exports (after disruption) m tonnes f 2013f 2014f 2015f 2016f Source: NBS, Macquarie Research, July July

23 Fig 21 Iron ore cost curve Supply curve to Chinese market for iron ore fines CIF Cost China ($/t) Vale Rio Tinto BHP Billiton FMG Other Australia Other Brazil India Africa China Other Volume (mt) Source: Company data, Macquarie Research, July 2012 In the short term rising steel inventory will have to be watched closely. In the short term, we note that iron ore inventory at smaller Chinese steel mills has fallen over the last two weeks to the lowest levels of the year to date. Inventory cover is now 29 days of use, down from 31.4 in mid- June. Over 2011, 28 days of cover appeared to be a floor level for inventory that was followed by rising prices (apart from during the stress conditions of October/November). If destocking at the smaller Chinese steel mills continues we should be below the 28 days of cover level very soon. At the same time, inventory volumes in millions of tonnes have remained flat since the middle of June. The implication of flat inventory combined with falling days of use is that production at the smaller Chinese steel mills has started to tick up after several weeks of cuts. While the iron ore inventory data is positive, steel inventory has also ticked up slightly over the past week, which is unusual for this time of year and suggests that any rise in production has not yet been met by a rise in demand. 11 July

24 Fig 22 Iron ore inventory at 50 smaller mills volume vs days of use Source: Macquarie Research, July 2012 Fig 23 Reported steel inventory at traders Source: Mysteel, Macquarie Research, July July

25 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. 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