A Primer re Gold Valuations & Development Costs and Private Equity’s Role in Frac Sands

SME Annual Conference & ExpoCMA 117th National Western Mining Conference

Denver, Colorado

Joel Schneyer – Managing DirectorFebruary 16, 2015

2013 Mining Markets At A Glance

Source:

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Number of Mining Companies by the Stage of Project Development

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Source:

Difficult Investment Landscape for Miners

Source: Modified from NovaGold - Presentation at San Francisco Gold Conference, November 2013

South America1.Peru: Construction halted at largest mine due to gov’t review and social unrest.2.Ecuador: Political obstacles and windfall tax discourage foreign investment in mining.3.Venezuela: Five mining companies seeking compensation through World Bank’s arbitration court following nationalizations.4.Bolivia: Nationalization of various natural resources assets.5.Argentina: Miners required to repatriate revenues from foreign sales, limitations imposed on foreign exchange. Controls on imports of equipment/supplies have also been tightened

Africa•Ghana: Increase in tariffs on mines and introduced a windfall tax, halting project expansions.•Guinea: New law gives government a 35% stake; threat of nationalization.•Mali: Recent military coup creating political uncertainty•Kenya: Rising mineral royalties and drilling fees for mining.•Congo: Plans to revise mining code, raise taxes and increase stake in mining projects•Zimbabwe: Gov’t plans to seize control of foreign-owned mines.•South Africa: Ongoing dialogue to nationalize mining industry.

Russia, Asia & Australia13.Indonesia: Newly proposed legislation limits foreign ownership of mines to 49%.14.Philippines: New royalties and taxes being imposed on mining companies.15.Mongolia: Drafting investment law to restrict foreign ownership.16.Kyrgyzstan: Parliamentary motion calling for increased government stake in one of its largest mines

Heightened Geopolitical/Permitting Risk in North America

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BC: Mt Polly tailings dam spill

Quebec: Native group $900 million lawsuit of Rio Tinto

BC: First Nations Supreme Court Ruling

Disconnect Between Gold Miner Indexes and Broader Market

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Source: Headwaters Research

Access To Public Capital Decreasing

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Source:

Permitting Times Are Increasing – The Donlin Gold Example

Source: NovaGold 2nd Q & Project Update Presentation, July 2014

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Source: MinEx Consulting, Mining Journal Gold Supplement, August 2014

Gold Discovery Costs Are Going Up

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Source: Metals Focus

$548

$1,066 $1,045

$/oz

Industry Experiencing Mining Cost Inflation

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$/oz

$535/oz

Margins Under Pressure

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Source: Metals Focus

Why Buy An Illiquid Share When You Can Buy An ETF?

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Source: Yahoo Finance

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Development Stage Gold Companies trade at an Enterprise Value of $16 per ounce of M, I, & I (NI 43-101) with average estimated project development costs of $91 per ounce

*EV = (share price x # shares) – current assets + total liabilities**9/29/2014 share prices at close Au=$1219.50/oz, Ag=$17.58/oz

The Development Stage Business Model Looks To Be Unsustainable

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Once the Project enters the Development Investment Analysis Phase (PEA – Prefeasibility – Feasibility), companies see a long period of share price erosion as studies, permitting and de-risking drag on.

Life Cycle of a Gold Mining Share

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Development Stage Gold Companies Trade on Average at $16/oz Resource

Costs to Complete Drilling, Feasibility & Permitting ~$10/oz Resource

Capital Development Costs $91/oz Resource

Owners Costs Not in Feasibility (25%) $23/oz Resource

Total $140/oz Resource

Actual Trading Market Multiples

• Small Gold Producers $71/oz Resource

• Intermediate Gold Producers $70/oz Resource

• Large Gold Producers $129/oz Resource

• Silver Producers $128/oz Resource

So What Is the Problem?

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The Institutional Money has lost confidence …

˗ that costs can be controlled

˗ that capital discipline will occur

˗ that restructurings can deliver on promises

˗ that returns on capital employed will improve

˗ that the industry won’t pile back into too many new projects or expensive

deals when prices rebound

˗ that resource nationalism will not overwhelm the industry

˗ that commodity prices will not collapse

˗ that “stuckholders” have an exit

… and the markets reflect this loss of confidence

Institutional Money Is Not Buying Gold Exploration Lottery Tickets

PE Investment Criteria

Project in the lowest quartile of cost curve

Favorable technical review Board representation or control Permitting timeline Aligned financial interests Singular execution focus Exit strategy

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Company

Project

Retail

Sovereign Wealth

Inst

itut

iona

l Mon

ey

Private Equity

Streaming & Royalty

Strategics

Merchant Traders

Mutual Funds

Major Shift In How Institutional Money Invests In Sector

Industry Observations – The Unconventional Shale Plays

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Industry Observations – Secular Demand Drivers for Proppant

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Proppant demand is expected to increase over the next several years

Proppant growth has outpaced rig count due to high service intensity and increased horizontal drilling

Pressure pumpers are increasing, facing efficiencies and completing jobs faster

Down spacing creates more locations to drill Use of cemented liners versus sliding sleeves increases sand usage Overall increase in frac sizes per stage Increased number of frac stages per well

Economics of the Unconventional Plays

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Source: Benteck Energy, 2nd Annual Frac Sand Conference, Minneapolis 2014

Frac Sand Shipping Flows

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Source: PLG Consulting, 2nd Annual Frac Sand Conference, Minneapolis 2014

Frac Sand Demand – Regional Sand Consumption (billion lbs)

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Source: PacWest Consulting, Frac Sand Logistics Conference – San Antonio, August 2014

Industry Observations – Proppant Demand Expected to Remain Strong

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(Millions of Tons)

(S/Ton)Historical and Projected Industry Proppant Demand

Source: Hi-Crush Partners Company Presentation, Freedonia Group

• Portfolio company of PE Golden Gate Capital, IPO in 2012; Golden Gate sold out its position in 2013

• Was formed by PE Insight Equity in 2012, IPO with LP structure in 2013. Still controlled by Insight Equity

• Was formed by PE Avista Capital Partners in 2010, IPO with LP structure in 2012. Still controlled by Avista Capital Partners

• Portfolio company of PE American Securities Capital Partners . IPO in Oct 2014

• July 2014 PE KKR leads $680 million recapitalization

• Portfolio company of PE Clearlake Capital. Filed Nov 2014 for IPO with LP structure

• Was portfolio company of PE Denham Capital Management. 2014 sold to U.S. Silica Holdings, Inc. for $98 million. Adjusted LTM EBITDA of $11.1 million represents purchase price of 7.6x EBITDA

• Portfolio company of PE Energy Capital Partners

Private Equity In Frac Sand

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Frac Sand Delivered Cost to Well Site

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Source: modified from Raymond James, Global Research Report, August 2014

The Miner = $60/t Revenue - $35/t OC = $25/t EBITDA1.5 million tonnes/yr x $25/t = $37.5 million EBITDA on $100 million investment

Gold Industry All-In Sustainable Cost H1 14

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Source: Metals Focus

The Headwaters Difference

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