PALISADE REPORT: TOLL MILLING IN PERU

August 2015

Palisade Research

PALISADE REPORT: TOLL MILLING IN PERU Mining reforms in Peru have created a new defensive sub-sector in mining that is poised for further growth

While Peru has not been immune to the current bearish commodity markets, there is a sub-sector that has emerged which has captivated the junior mining space due to its ability to ramp-up cash flow and profitability in just a matter of months.

A picture of the Mollehuaca Processing Facility in southern Peru.

Toll-milling has quickly become the new buzz word, and there has been a rush by so-called ‘zombies’ on the Venture to acquire www.palisade-research.com

Palisade Report: Toll Milling In Peru

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plants, purchase local ore, and flip the finished gold for a quick buck.

The relatively simple nature of toll-milling is attractive and in this brief primer we take a look at how the toll-milling space emerged, the associated economics, and a summary of the key players now with active operations (Dynacor (TSX:DNG), Anthem United (TSXV:AFY), Inca One Gold Corp (TSXV:IO), Standard Tolling (TSXV:TON), and Montan Mining (TSXV:MNY)).

In our opinion, Peru remains one of the most attractive mining-jurisdictions in the world.

In recent years (albeit before the commodity correction), the country experienced rapid development in both exploration and production. The prolific of resources and a stable fiscal regime saw a significant inflow of foreign capital and the mining sector now accounts for more “In our opinion, than 13% of foreign direct investment.

Map of Peru. Most of the toll milling operations in Peru are located in the Southeast in and around Arequipa.

Peru remains The government has shown a clear one of the most commitment in working with foreign attractive mining companies to develop the mining jurisdictions in sector and there is approximately $60 billion in major projects currently the world.” awaiting development.

While the majority of development has been earmarked for copper, it’s no secret that Peru is also a major gold producer.

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According to blended figures from the US Geological Survey and Peru’s Ministry of Energy and Mines, Peru is the 7th largest producer of gold in the world and hosts the 8th largest reserves.

Gold Production by Country 500 450 400 Metric Tons

350 300 250 200 150 100 50

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Source: palisadecapitalcorp.com | palisade-research.com, US Geological Survey, Peru’s Ministry of Energy and Mines

Gold Reserves by Country 10,000 9,000 8,000

Metric Tons

7,000 6,000 5,000 4,000 3,000 2,000

Peru has a rich history of gold mining beginning with the Incan Empire. Explorers to this day make the perilous trek into the Amazon to find the lost city of Paititi and the treasure troves of gold, silver and jewels that supposedly come with it.

1,000

Incredibly, some of the archaic methods of gold extraction used by the Source: palisadecapitalcorp.com | palisade-research.com, US Geological Survey, Peru’s Ministry of Energy and Mines Incan Empire are still used today by artisanal miners Peru ranks number 7 who have passed on their methods from generation to in gold production globally, and number 8 generation.

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in gold reserves by country.

Over the last forty years, the number of artisanal miners has increased substantially, with the majority of the growth during the earlier part.

Like many South American countries, Peru has a history of internal conflict and many Peruvians turned to mining to combat the economic crisis that resulted from it.

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Artisanal miners were able to provide for their families and even the poorest were able to find incredible wealth. This was especially apparent during the late 1980s with the liberalization of key markets and a surge in commodity prices.

Peru Gold Production By Year 200 180 160 140

Metric Tons

The strife was further exaggerated by confusion and displacement caused by a civil war and the decline of agricultural yield.

120 100 80 60 40 20 - 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: palisadecapitalcorp.com | palisade-research.com, Peru’s Ministry of Energy and Mines

Now it is important to note that while artisanal mining helped many Peruvians during the country’s darkest times, artisanal mining is largely unregulated and illegal.

Fast forward to today, Peru finally has a stable government and the administration is the country’s first to attempt to eliminate illegal mining. There has been enormous pressure on President Ollanta Humala to regulate artisanal miners which are destroying rainforests at an unprecedented rate and contaminating communities with the usage mercury, a dated technique used to remove gold from ore.

Above: Gold production has declined slightly yearover-year since 2011. Below: A Peruvian miner tows a rail car full of gold-bearing ore. Source: Swissinfo

The Peruvian government estimates that ~20% of gold exports is from illegal mining and is costing the government up to an estimated $630 million in lost tax revenue per annum.

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Artisanal Mining and the Rise the Toll Milling Space Artisanal mining is defined as operating in less than 1,000 hectares of space and excavating less than 25 tonnes of ore per day.

Miners manually crush rocks to reach the gold contained within. Source: Eduardo Martino

There is an estimated 100,000-300,000 artisanal miners in Peru and to document them, a decree was passed in 2012, which mandated them to register and formalize operations within a two year time line.

Obviously, the ultimate goal of the Government was to keep track of artisanal operations and to collect their precious taxes. To encourage this new regime, authorities fast-tracked certain areas of permitting with small-scale mills (up to 350 TPD) being one of them.

Since miners can now only use permitted mills, domestic and foreign companies swooped in and acquired these mills and thus igniting arguably the hottest subsector in mining.

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Palisade Report: Toll Milling In Peru

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In the petering commodity markets, toll-milling in Peru is attractive due to its high margin cash-flow and accelerated ramp-up. Buying ore at a discount to market price and selling gold at market price while passing on costs to the miner gives a natural hedge, and toll-millers can focus solely on running its operation efficiently while looking for attractive growth opportunities.

Above: This flowchart demonstrates the steps required by toll millers Below: Production and Applications by region

Understandably, the 2002 decree has been met with extreme pushback and the deadline to register was pushed back multiple times. There have been protests and violent uprisings throughout the key mining states, and at last count, only ~60,000 miners have registered.

Applications by Region

45

16,000

40

14,000

35

12,000

30

Applications

25 20 15

8,000 6,000 4,000

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Source: palisadecapitalcorp.com | palisade-research.com, Peru’s Ministry of Energy and Mines

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Production By Region

Source: palisadecapitalcorp.com | palisade-research.com, Peru’s Ministry of Energy and Mines

Furthermore, not every miner that has registered will be able to complete all the stages of formalization required by the authorities. We foresee this being a major problem in the future because as the toll-milling space becomes saturated, operators will have a harder time finding sources of ore.

Of the different regions Peru, the ideal location for a toll-millers is where both gold production and access to ore is the greatest, which makes Arequipa the hotbed for current activity. Not only are toll-millers able to purchase ore from multiple sources,

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the region is ripe with tailings that will also be able to subsidize traditional channels of supply.

Ore will always be purchased at a discount to the market and the miners will bear the burden of attributable treatment costs (called maquila). This accompanied by no mine development costs and no need for major equipment, gives toll-milling all the upside of gold companies, but less downside risk.

The Economics of Toll-Milling The first step in toll-milling is acquiring feed, obviously the higher the grade the more gold the ore will yield. For this example, we used a conservative average grade of 0.5 oz/t.

Miners struggle to formalize their activities under the Garcia and Toledo governments. Source: Eduardo Martino

Note: A lot assumptions are estimates or extracted from publicly released data. A toll-miller will never divulge information or data it does not have to because of the competitive nature of pricing.

Key takeaways include, in addition to the toll-miller buying the feed at a discount to the market, the miner will always foot the treatment cost. Consequently, the toll-miller will maintain a margin even when gold prices are declining. Subjectively, artisanal miners will always try to maximize their www.palisade-research.com

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profits, thus when gold prices decrease, they will take the time to hunt for higher grade ore to make-up for the lower price.

This scenario seems to be the norm and one of the benefits of having numerous sources of ore. In traditional mining, performance is dependent on grade, ore type, and other uncontrollable factors. In toll-milling there are less variables to worry about, which means less volatility.

Example of Acquiring Feed and Revenue Calculation at $1,200/oz Gold

Since the toll-miller does not have to worry about mining, the costs are limited to operating the mill, which can be broken down to fixed and variable costs per metric

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ton. Ideally a plant is operating three shifts per day and six days a week. This would decrease operating costs while processing the most amount of ore.

Total Operating Costs for a 250 TPD Mill

The lion’s share of operating costs is the fixed component and is composed primarily of labour costs. Regardless if there is feed or not, labourers are paid for the full shift as their skills are very transferrable and it is important to keep qualified personnel.

$80 $70 Materials, $20 $60

$/ton

$50

Power, $15

$40 $30 Fixed Costs, $40

$20 $10 $-

Operating Costs Source: palisadecapitalcorp.com | palisade-research.com

Power is a variable component and dependent on diesel pricing. And lastly, the material component includes parts and the necessary chemicals to process ore.

Operating Costs for a 250 TPD Mill

Clearly we have used conservative estimates for this report, but even with high operating costs the economics remain attractive. For a standard 250 TPD plant acquired for $10.0 million, we derive a net present value of $17.29 million and an internal rate of return of 49%, assuming a 20-year plant life.

Net!Present!Value!of!a!$10.0M!/!250!TPD!Plant!($M)

!Discount!Rate!

Other key cash outlays include sustaining capital expenditures, taxation, and ore. Sustaining capex for smaller plants is generally 3-4%

8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5%

%%%%%%%%%%1,150 %%%%%%%%%%19.02 %%%%%%%%%%18.11 %%%%%%%%%%17.26 %%%%%%%%%%16.45 %%%%%%%%%%15.69 %%%%%%%%%%14.97 %%%%%%%%%%14.29

%%%%%%%%%%1,200 %%%%%%%%%%19.95 %%%%%%%%%%19.02 %%%%%%%%%%18.13 %%%%%%%%%%17.29 %%%%%%%%%%16.50 %%%%%%%%%%15.76 %%%%%%%%%%15.05

Gold!Price!($/oz.) %%%%%%%%%%1,250 %%%%%%%%%%1,300 %%%%%%%%%%20.89 %%%%%%%%%%21.82 %%%%%%%%%%19.92 %%%%%%%%%%20.82 %%%%%%%%%%19.00 %%%%%%%%%%19.87 %%%%%%%%%%18.14 %%%%%%%%%%18.98 %%%%%%%%%%17.32 %%%%%%%%%%18.13 %%%%%%%%%%16.54 %%%%%%%%%%17.33 %%%%%%%%%%15.81 %%%%%%%%%%16.57

%%%%%%%%%%1,350 %%%%%%%%%%22.76 %%%%%%%%%%21.72 %%%%%%%%%%20.75 %%%%%%%%%%19.82 %%%%%%%%%%18.95 %%%%%%%%%%18.12 %%%%%%%%%%17.34

%%%%%%%%%%1,400 %%%%%%%%%%23.70 %%%%%%%%%%22.63 %%%%%%%%%%21.62 %%%%%%%%%%20.66 %%%%%%%%%%19.76 %%%%%%%%%%18.91 %%%%%%%%%%18.10

Table shows Net Present Value of a $10.0 M Plant

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of the total plant cost per year.

This figure will depend on the quality of the operating and maintenance program in place, and is smoothed over the life of the asset. The current income tax rate is 30%, however, will decline to 28% in 2016 and there is no value added tax on goods and services as the end product will be exported.

Lastly, something that new entrants should be aware of is there must be enough cash float to maintain at least a month’s supply of ore. This ensures the plant will always have feed and there are no disruptions in processing.

Above: Despite the harsh conditions, tens of thousands still work in gold mines at La Rinconada in Peru. Source: Albert Gonzalez Farran

Many companies aim to pay miners within 48 hours to keep them happy, any plant which take any longer will find itself losing valuable customers and feed.

Below: All numbers are post financing

Toll-Millers Ticker Dynacor(Gold(Mines(Inc Anthem(United(Inc Inca(One(Gold(Corp Standard(Tolling(Corp Montan(Mining(Corp

DNG.TO AFY.V IO.V TON.V MNY.V

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'Price' (C$) $((1.81 $((0.35 $((0.16 $((0.09 $((0.13

'Shares' (mm) (((36.32 (((82.50 (((69.69 (((54.45 (((36.32

'Mkt'Cap' (C$'mm) (((((((((65.74 (((((((((28.88 (((((((((11.15 (((((((((((4.90 (((((((((((4.72

'Cash' (C$'mm) (((((((((18.81 (((((((((((5.14 (((((((((((1.20 (((((((((((3.87 (((((((((((3.00

'Debt' (C$'mm) (((((((((((((> (((((((((((1.94 (((((((((((9.00 (((((((((((4.61 (((((((((((0.18

Palisade Report: Toll Milling In Peru

EV (C$'mm) (((((((((46.93 (((((((((25.67 (((((((((18.95 (((((((((((5.64 (((((((((((1.90

''Current' Capacity' TPD (((((((((300 ((((((((((> (((((((((100 (((((((((((30 ((((((((((>

'Planned' Capacity' TPD (((((((((((((((600 (((((((((((((((560 (((((((((((((((250 (((((((((((((((350 (((((((((((((((150

'EV/Capacity' (C$'/'TPD) ((((((((((((78,216 ((((((((((((45,845 ((((((((((((75,802 ((((((((((((16,121 ((((((((((((12,677

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Dynacor Gold Mines Inc (TSX:DNG) Dynacor Gold Mines is the first-mover into the toll-milling space in Peru and is arguably the benchmark of a successful operator. The company currently operates the 300 TPD Metallex plant in Huanca and is building another 300-600 TPD plant in Chala. Dynacor also has some exposure to exploration, namely 100%-owned Tumipampa, Anta, and Casaden.

Share&Price&(July&15,&2015)&(C$) Shares&(mm) Warrants&(mm) Options&(mm) FD&Shares&(mm) Market&Capitalization&(C$&mm) FD&Market&Capitalization&($C&mm) Cash&and&Equivalents&($C&mm) Debt&($C&mm) Enterprise&Value&($C&mm)

$&1.810 &&&&36.32 &&&&&&&&@ &&&&&&2.45 &&&&38.77 &&&&65.74 &&&&70.17 &&&&18.81 &&&&&&&&@ &&&&46.93

52@Week&High&(C$) 52@Week&Low&(C$) 3@&Month&Average&Volume

$&2.590 $&1.410 &29,829

Tumipampa is the most advanced, consisting of three distinct zones and a main structure (Manto Dorado) open at strike and depth. Dynacor is currently advancing Tumipampa from an underground mantos and vein system to high-grade gold resources and/or reserves.

Management and Significant Investors Jean Martineau, President & CEO – Mr. Martineau has been at the helm of Dynacor since it was founded in 2006. He brings over 25 years of experience in the Canadian mining industry as both a Director and a successful broker. Mr. Martineau is an experienced operator having run a pulp-mill in Venezuela for four years, and turned the toll-mill to cash flow model into a viable business strategy.

Red Oak Partners, LLC, Significant Investor (7.3%) – Red Oak did a lot of due diligence before accumulating shares in Dynacor. After numerous conversations, meetings, and even a site tour of all the facilities, the fund is ‘going nowhere’ and are long-term shareholders, and will continue accumulating shares. Red Oak has been in the news as a ‘dissident’ investor, wanting improvements to Dynacor’s corporate governance.

We believe having Red Oak in the mix is actually a positive. While we do not have an actual stance on the board’s independence, we agree that management should have more of a stake in the company, and they have addressed this. Dynacor has stated it

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believes in the concept of ‘skin in the game’ and is working on a new charter to align policy with best practices.

Investment Highlights and Risks • Established operations and cash flow – Dynacor’s flagship Huanca plant has been in operation since 1998 and processes high-grade ore from 250-300 artisanal miners. The plant originally operated at a 250 TPD capacity, however, was issued a permit from the MEM in April 2015 to increase the capacity to 300 TPD, which should be completed by H2 2015. Huanca will remain the cash cow for the near future of Dynacor as both the facility and staff are proven and efficient. • Organic growth – In March 2015, the Government of Peru issued a final construction permit for Dynacor’s Veta Dorada plant in Chala. Veta Dorada has a planned capacity of 300-600 TPD and is projected to cost $12.9 million. The plant will be directly linked to national power grid and is located just off the PanAmerican Highway. Approximately $3.0 million has already been spent and the rest will be funded internally. The facility stands to double Dynacor’s ore processing and aims to be operational by H1 2016. Furthermore, the plant has been designed to be expanded to 450 TPD by adding additional processing lines and ball mills. • First TSX-listed Company to receive permit for an operation > 350 TPD – Dynacor first began its application process for the Veta Dorada plant back in November 2012, and was finally issued a construction permit. Dealing with the Federal Government is a long and arduous process, but with the first permit done, Dynacor is in the position to streamline future applications and grow capacity faster if it chooses that route. • Attractive infrastructure – Dynacor’s new plant is just off the Pan-American Highway which will make access very convenient, something key in such a competitive environment. According to our research, there are many smaller plants located in remote areas where trucks hauling ore must drive down dirt roads for hours before their destinations are reached. Obviously the most efficient and convenient plants will have the most business. www.palisade-research.com

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• The holy dividend – Once the second plant becomes operational and cash flow has stabilized, we believe Dynacor will declare a dividend. This instantly will increase liquidity as funds who have a yield mandate will begin investing for both the income and growth. • Free call option on exploration – For our analysis, we did not place a value on Dynacor’s exploration assets, even though something is definitely there. $3.5 million has been earmarked for exploration at Tumipampa and it will be funded internally. For the reasons listed, Dynacor remains the premier company in the toll-milling space. However, a lot of the company’s growth hinges on its ability to construct the Veta Dorada plant and secure enough ore for feed. Obviously the plant will need to de-risked, however, as milestones in construction are achieved the market should react positively. The second plant will more than replenish Huanca as operations will begin winding down as tailings capacity reaches its max. Huanca is an older plant and off the beaten path, Veta Dorada will become the new crowned jewel of the tollmilling space. Dynacor is the least risky of toll-millers and has substantial institutional support.

Anthem United Inc. (TSX-V:AFY) In terms of capacity, after the acquisition of Anthem’s second plant is completed and it is recommissioned, the company will have a net capacity of 560 TPD.

Anthem’s first plant is the 80%-owned 350 TPD Koricancha mill currently being developed in Arequipa. Construction began in Q3 2014 and commissioning of the plant is expected in Q2 2015. Koricancha is expected to cost $10 million and is funded

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Share&Price&(July&15,&2015)&(C$) Shares&(mm) Warrants&(mm) Options&(mm) FD&Shares&(mm) Market&Capitalization&(C$&mm) FD&Market&Capitalization&($C&mm) Cash&and&Equivalents&($C&mm) Debt&($C&mm) Enterprise&Value&($C&mm)

$&0.350 &&&&82.50 &&&&28.57 &&&&14.20 &125.27 &&&&28.88 &&&&43.85 &&&&&&5.14 &&&&&&1.94 &&&&25.67

52QWeek&High&(C$) 52QWeek&Low&(C$) 3Q&Month&Average&Volume

$&0.600 $&0.300 &&&&5,398

*Post&Financing

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by an equity financing and through a gold sales agreement.

In addition to Koricancha, Anthem recently acquired a second milling operation, the 80%-owned 350 TPD Chaparra mill also in Arequipa. The asset purchase comes with three mineral claims and an offtake agreement with miners operating on the claims. The off-take is good for 60-100 TPD at an average of 20 g/t.

The total consideration of the Chaparra mill and claims is $14 million which Anthem will fund 100% but will recover 20% from its partner. The final $7 million payment will be made before February 2016 and expected to be processing ore by H2 2016.

Management and Significant Investors Greg D. Smith, President, CEO & Significant Investor (15.26%) – While young, Mr. Smith has already amassed an incredible track record, most recently as the President and CEO of Esperanza Resources, a company he sold to Alamos Gold in August 2013 for C$70 million. In 2013 he was also on the on the Board of Premier Royalty, which was acquired by Sandstorm Gold for $30 million and was also the CFO of Minefinders Corp from 2006 until it was acquired by Ross Beaty’s Pan American Silver for C$1.5 billion. Lastly, Mr. Smith serves as a Director for both Chesapeake Gold and Lowell Copper.

Marcel de Groot, Director – Mr. de Groot, the President and Co-founder of the venture capital company, Pathway Capital, is also a perennial winner. His company has raised over $800 million in equity and completed more than $900 million in transactions. He served as a Director for Underworld Resources when it was acquired by Kinross $138 million and is also the former Chairman of Luna Gold. He is currently a Director of Lowell Copper and Asanko Gold.

EMC Green Group (25% JV Partner) – EMC is a private Peruvian company and will be Anthem’s operator. It will also be responsible for permitting, compliance and legal issues, and sustaining ore contracts. EMC has a strong community initiative in place and have a high-profile lawyer on the team working with mining groups to get them up to speed with regulatory requirements. EMC is Anthem’s eyes and ears on the ground and are a 100%-Peruvian company.

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Investment Highlights and Risks • Entering the toll-milling space with a bang – Pending no setbacks with the ramp-up of Koricancha and the acquisition of Chaparra, Anthem United can leapfrog Dynacor and become the largest toll-miller listed on the Canadian market; that is until Dynacor’s second plant is built-out to its maximum potential capacity. However, depending on Dynacor’s timeline to 600 TPD, Anthem stands to become the new benchmark of the toll-milling space.

• First-class assets – Anthem’s assets were built specifically for the new tollmilling regime. Many players in the space are forced to use older, refurbished plants. We are not saying that that older plants cannot do the job (Dynacor for example), newer plants simply run more smoothly and are built to scale accordingly. Newer assets = greater book value.

• Undervalued if projected cash flow is achieved – Anthem is definitely trading at a discount to its projected free cash flow. While our numbers are not as robust as Anthem’s internal economics, there is still a significant disconnect between value and where the stock is currently trading.

• Proven and capable management team – As with any junior resource company, the majority of value will be derived from the people running it. In this case, Greg Smith’s proven track record and the companies and people within his inner circle. This includes Pathway Capital’s portfolio companies and Nolan Watson of Sandstorm Gold. If there is any time that can make something happen even in the worst of bear markets, it’s this one.

Anthem United has been getting good coverage, however, the stock is still illiquid. Also, we expect there will be some growing pains as it fine tunes both mills. A lot of Anthem’s success will be dependent on if EMC Green Group if they can deliver operationally and also in establishing and maintaining relationships with miners.

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Inca One Gold Corp. (TSX-V:IO) Inca One Gold Corp was first incorporated in 2005 as an exploration company engaged in acquiring and developing mineral assets. In 2013, Inca One adapted to the bearish markets and changed its business strategy, acquiring the Chala plant in Southern Peru for $240,000.

Share&Price&(July&15,&2015)&(C$) Shares&(mm) Warrants&(mm) Options&(mm) FD&Shares&(mm) Market&Capitalization&(C$&mm) FD&Market&Capitalization&($C&mm) Cash&and&Equivalents&($C&mm) Debt&($C&mm) Enterprise&Value&($C&mm)

$&0.160 &&&&69.69 &&&&15.30 &&&&&&6.20 &&&&91.19 &&&&11.15 &&&&14.59 &&&&&&1.20 &&&&&&9.00 &&&&18.95

52PWeek&High&(C$)

$&0.285

The plant was refurbished from the get-go, 52PWeek&Low&(C$) $&0.120 and achieved a capacity of 25 TPD, 3P&Month&Average&Volume &94,117 reporting first production in November *Post&Financing 2013. The plant has since been upgraded to a 100 TPD facility and the company is in the process of applying for commercial permits to increase capacity to 250 TPD, and according to management, can expand to 300 TPD relatively easily. To get to 250 TPD, we estimate it will cost the company another $4-5 million.

With the focus now away from exploration, Inca One seems to have to have hit its stride, actively looking for additional mills and expansion opportunities. The company has community initiatives in place to maintain relationships with its miners and have been the most creative in raising funds to upgrade its plant. The company has a clear long-term strategy in place and will continue to ramp-up processing and cash flow.

Management and Significant Investors Edward Kelly, CEO & Director – Mr. Kelly brings over 20 years of experience in sales, marketing, and business development. As seen with the renaissance of Inca One, Mr. Kelly is a turnaround specialist and has been active in many sectors, including real estate and food. He has served as a Director of Clickhouse.com, Dajin Resources, Aurora Cannabis, Lornex Capital, and Ultra Lithium.

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Rafael Rossi, Director Finance & Administration Peru – Mr. Rossi brings over 30 years of experience as a Senior Executive in both private and public companies. For the last 16 years he served as the Senior Finance Manager and Controller of Barrick Gold’s operating subsidiary encompassing the Pierina and Lagunas Norte mines in Peru. Thus, knows how to do business and Peru and will be leaned on heavily in current and future business deals.

Investment Highlights and Risks • Simple, continued growth – According to our analysis, at 100 TPD and the current debt level, Inca One is undervalued by the market. There is beauty in the simplicity of Inca One’s plan moving forward. The company plans on increasing the Chala plant’s capacity to 200 TPD, and that according to Ed Kelly, is when the real profits kick in. Mr. Kelly has already proven he is able to utilize existing infrastructure to increase capacity, it’s just a matter of raising the money to do so.

• Acquisition of a second plant – Because the permitting process can take months, we would not be surprised if Inca One announces the acquisition of a second plant before receiving the necessary permits to expand. Plant 2 will probably have an initial capacity of 100 TPD with the ability to increase capacity like the Chala.

Inca One’s ability to raise money in these markets has been a double-edged sword. On one side the company has been able to increase its capacity and ramp-up cash flow; on the other side the company now has obligations of ~$9 million, with interest payments of over $1 million on an annualized basis, if current levels are kept constant. At 100 TPD, the payments are more than manageable, however, the company plans on borrowing more to fund future growth. Thus, the ability for management to deliver is critical.

Inca One plans on increasing production by managing its ore intake actively and working on plant efficiencies. The company continues to receive 25-30% higher than needed intake of ore, and once the higher grade sources are determined, Inca can begin phasing out the lower grade suppliers. The company has several catalysts on the horizon and the story remains compelling. Thus far, Inca One has been able to create value for its shareholders and we do not see why it cannot remain on this www.palisade-research.com

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course. We would rate Inca’s risk profile in the lower band relative to its peers. Expect high-impact news releases in the near future.

Standard Tolling Corp. (TSX-V:TON) Standard Tolling Corp. is the more unique of the toll-millers, operating in northern Peru rather than the south. Being one of only two legal plants in the area, Standard Tolling will have less trouble securing feed than its southern counterparts.

The company is currently building its 100 TPD which will be good to go in about a month. Standard expects an initial throughput of 30-40 TPD, ending 2015 at 100 TPD, and subsequently upgrading to 350 TPD in June 2016.

Share&Price&(July&15,&2015)&(C$) Shares&(mm) Warrants&(mm) Options&(mm) FD&Shares&(mm) Market&Capitalization&(C$&mm) FD&Market&Capitalization&($C&mm) Cash&and&Equivalents&($C&mm) Debt&($C&mm) Enterprise&Value&($C&mm)

$&0.090 &&&&54.45 &&&&43.87 &&&&&&3.68 &102.00 &&&&&&4.90 &&&&&&9.18 &&&&&&3.87 &&&&&&4.61 &&&&&&5.64

52QWeek&High&(C$) 52QWeek&Low&(C$) 3Q&Month&Average&Volume

$&0.250 $&0.090 &72,847

*Post&Financing

Standard Tolling has assembled an impressive team, and only Len Clough, the President, CEO & Chairman, is based out of Canada. The rest of the team calls Peru home, making Standard Tolling a true Peruvian-operating company.

Management and Significant Investors Len Clough, President, CEO & Chairman – Like many successful mining executives, Mr. Clough began his career in wealth management, beginning with RBC Dominion Securities in 1998 to 2010, and ending with Kingfisher Advisors SA as Managing Director in 2010 to 2013. In addition to founding Standard Tolling, Mr. Clough serves as a Director of TSX-listed Dynasty Mining.

Peruvian Management Team – The group Len put together for its toll-milling operation is in the upper band of management teams. The company boasts the top three key players in developing and operating the 3,000 TPD Don Mario Mine in Bolivia. The team oversaw several key expansions that increased overall capacity www.palisade-research.com

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from 650 TPD to 3,000 TPD, and have implemented the same cost-savings measures in Standard’s flagship plant near the city of Huamachuco. Accordingly, Standard’s self-engineered plant will have lower operating costs and sustaining capital expenditures.

Investment Highlights and Risks • Premier Operator in Northern Peru – As mentioned earlier, there is only one other legal mill in Northern Peru, which operates at 60 TPD and having issues with its recovery. Furthermore, the other plant seems to be having liquidity issues and cannot offer the fast cash turnaround that is becoming the industry norm. Accordingly, many miners are forced to truck their ore to the plants in the south and give up valuable profit due to trucking costs. Standard Tolling has the advantage here and are slowly winning the trust of these local miners. As more miners begin to see Standard’s 90%+ recovery rates and accelerated payments, expect to see an influx of the highest grade ores in the area.

• Road to growth, organically or by acquisition – Standard Tolling aims to finish 2015 at 100 TPD and to be at 350 TPD by June 2016. The cost to get to 350 TPD is expected to be ~$2 million with a lot of the infrastructure already built. This includes the lab, power, crusher, and ore sorting capabilities. In our conversations with management, there are several acquisition prospects in the area and the initial numbers look accretive. Obviously any operational news or acquisitions stand to act as catalysts.

• Battle-hardened and stingy management team – Standard Tolling’s operators have extensive experience in operating in bearish, capital-constrained markets. They have adapted by developing major costs-savings initiatives and are drawing upon past experience to address design flaws of the mill implemented by the previous owner. All surveying, drafting, and engineering is done in-house and has really helped with the bottom line.

Considering that Standard Tolling is expecting to commence operations any day now, the market capitalization of ~$7 million is irrational. Standard seems to be the company of choice by the other management teams (second to their own, of

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course), and we have constantly been told how impressed they were of Len’s operations.

One factor that may be scaring investors is the location of Standard’s mill. It is no secret that there is far more criminal activity in northern Peru and Standard has been forced to be ‘extra careful’ in its dealings. Furthermore, the north is at a higher elevation and is more mountainous, getting around is harder and more expensive.

We believe the market’s perception of the risks associated with Standard Tolling are ill-conceived. There are always risks in investing in companies operating in emerging countries and no matter where a plant is located, there will always be ‘friction’ with its (illegal) competitors. What investors fail to notice is Standard is 2 kilometers away from a town of 100,000 people that services Barrick’s Lagunas Norte and Rio Alto’s La Arena. There is also a military literally on the doorstep. Cash flow doesn’t lie and we have a feeling Standard Tolling will be experiencing a nice pop in the near future.

Montan Mining Corp. (TSX-V:MNY) Montan Mining is the newest entrant into the toll-milling space and we believe has been overlooked by the market. This is largely due to the fact that Montan has not closed on its announced acquisition of the Mollehuaca plant and the mining rights for the nearby Eladium gold mine and the Saulito property in the Arequipa region of southern Peru. We expect the transaction to be approved by the TSX Venture exchange by late September 2015.

Share&Price&(July&15,&2015)&(C$) Shares&(mm) Warrants&(mm) Options&(mm) FD&Shares&(mm) Market&Capitalization&(C$&mm) FD&Market&Capitalization&($C&mm) Cash&and&Equivalents&($C&mm) Debt&($C&mm) Enterprise&Value&($C&mm)

$&0.130 &&&&36.32 &&&&16.70 &&&&&&1.88 &&&&54.89 &&&&&&4.72 &&&&&&7.14 &&&&&&3.00 &&&&&&0.18 &&&&&&1.90

52QWeek&High&(C$) 52QWeek&Low&(C$) 3Q&Month&Average&Volume

$&0.260 $&0.050 &60,428

*Post&Financing

The Mollehuaca plant was recently expanded to 150 TPD, and is will have a start-up throughput of 30 TPD. Montan is in the process of raising $3.1 million and significant portion of the financing has been earmarked to ramp-up operations. Concurrently, Montan plans to apply for www.palisade-research.com

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commercial permits to increase capacity to 350 TPD. While Montan does not technically own Mollehueca, the have already assumed the position of operator. The deal is heavily in Montan’s favor, and Goldsmith Resources SAC, the current owner of the assets, has been more than accommodating.

Management and Significant Investors Ian Graham, CEO & Director – Mr. Graham brings over 20 years of experience in the mining sector, specifically in the development and exploration of mineral projects. Prior to Montan, he was the Former Chief Geologist with the Project Generation Group at Rio Tinto, and was involved with the evaluation and predevelopment work on several projects in North America and India. Luis Zapata, Executive Chairman – Mr. Zapata is a dual Canadian/Peruvian citizen and was previously the Partner and Head of Capital Markets at Seminario SAB, Peru’s largest independent brokerage firm. Prior to that Mr. Zapata lead of Latin America Institutional Equity Sales at Canaccord Genuity.

Mr. Zapata is definitely the wild card in Montan, his family operates the largest privately-owned toll milling business in Peru at an estimated 500-600 TPD. In fact, Mr. Zapata tried to convince them to go public during his time at Canaccord, but failed because according to them, wanted to see how the market values public tollmillers before deciding. Thus, Mr. Zapata is looking to get into the family business from humble beginnings, but will have the already established resources and network to rely on. This connection will be leveraged and will give Montan an edge among its competitors.

Investment Highlights and Risks • High-risk, highest-reward investment – For those of you looking to get in on the ground floor, Montan Mining is the investment for you. We believe Montan is undervalued despite financing concerns. The reality is, there are many different financing options in the toll-milling space, deciding which route will maximize shareholder value takes time. The company has already tranched $530,600, and needs a total of $2-2.5 million to put its plans into action. Obviously a cash buffer

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would be nice, we suspect the financing to be restructured to include some sort debt. • Pie-in-the-sky, leveraging connections for M&A – Like other toll-millers, Montan has already been actively vetting potential acquisitions. Once Montan reaches “proof-of-concept” capacity, we suspect Mr. Zapata will table a merger with his family company, Layteruma, to potentially create the largest toll-milling company in Peru. A lot has to happen before this merger can occur, but amongst its peers, only Montan has the option of a merger of this magnitude with a private toll-miller. Montan is essentially starting from scratch, and in addition to raising money, it must also secure sources of ore. We have heard the plan management has in place to achieve its near-term and long-term goals, and while we are skeptical all of it can happen in the outlined timeframe, we believe the company will be able to compete with the rest.

The location of Montan’s plant is off the beaten path, but the company has clear community initiatives in place, and will have also have the Eladium gold mine as a source of ore. Definitely the riskier investment in the toll-milling space and a lot of moving parts. But we have met with management several times and believe they have the drive and ability to get it done.

Investment Themes and Recommendations Attractive Economics and Accelerated Ramp-Up to Cash Flow – Toll-milling in Peru is attractive because unlike traditional mining, large amounts of capital is not needed. Looking at past transactions, plants can be acquired or built at a fraction of the cost of a mine, and can generate cash flow after a short ramp-up. Investors are gravitating toll-millers as the sector brings the unique combination of growth and the possibility of a yield.

‘Perpetual Cash Flow’ – A mine has finite reserves, thus a limited life. Furthermore, the costs of mining have been significantly increasing in recent years cutting into margins and rendering thousands of projects uneconomic. Toll-mills can have lives

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of up to 50 years, and have built-in margins that are dictated by the purchasing terms between the mill and miner. Also, the treatment costs, or ‘maquila’, is passed onto the miner, which further ensures margins are supported.

Continuing with the theme of ‘perpetual cash flow’, it may be wise to apply a cash flow multiple rather than NPV calculation, as we did earlier, to derive a fair valuation of a toll miller. Using Dynacor’s price-to-LTM CF of ~6x, the value of a 250 TPD would increase in value by 15%, or to ~$20 million. Some might argue (and we are in the same camp) that a 6x CF multiple is too small, considering gold producers have multiples ranging from 5-9x, while royalty companies trade at a staggering ~15-20x. As far as we are concerned, the market has not realized that toll-millers operate more as midstream companies, thus, are less risky than the group it is normally lumped together in. Once the market realizes this, the water will begin to rise.

Scalability? – As mentioned earlier, a small scale miner is defined as operations under 350 TPD; staying under means all permitting is done through the regional government. Anything more than 350 is classified as medium or large and is regulated by the Ministry of Energy and Mines (MEM) in Lima, and permitting takes a lot longer. Accordingly, the majority of new entrants into this subsector all have plants less than the 350 TPD threshold. Once capacity has been achieved, the company must either acquire or construct a new plant.

While the IRR and NPV of a toll-mill is attractive, it will never build a multi-billion dollar company that one world-class mining project can. Furthermore, we are cautious and aware that ore supply will be limited, especially with the current pushback back from miners. Dynacor depend on 250-300 miners for its feed, thus, the subsector will become aggressively competitive as more plants come online.

Scalability will be an issue, however, in our opinion, it’s too early for it to be a concern. From the companies we spoke to, obtaining ore is not the concern, getting the plants up to capacity and maximum efficiency is. Furthermore, every company we have met with has community initiatives and strategies in place to ensure a constant stream of ore will be available in the future.

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Disclosures* Palisade(Capital(and(its(affiliates(have(posi1ons(in(ALL(of(the(companies(men1oned(in( this(report.(We(were(not(paid(by(any(of(these(companies(to(write(this(report,(but(we( do(stand(to(benefit(from(any(volume(this(report(stands(to(generate.(The(informa1on( contained(in(such(publica1ons(is(not(intended(as(individual(investment(advice(and(is( not(designed(to(meet(your(personal(financial(situa1on.((

A group of formalized women miners work at a site in Arequipa. Source: Eduardo Martino

Informa1on(contained(in(this(report(is(obtained(from(sources(we(believe(to(be( reliable,(but(its(accuracy(cannot(be(guaranteed.(The(opinions(expressed(in(this(report( are(those(of(Palisade(Capital(and(are(subject(to(change(without(no1ce.(The( informa1on(in(this(report(may(become(outdated(and(there(is(no(obliga1on(to(update( any(such(informa1on.( Any(Palisade(Capital(publica1on(or(web(site(and(its(content(and(images,(as(well(as(all( copyright,(trademark(and(other(rights(therein,(are(owned(by(Palisade(Capital.(No( por1on(of(any(Palisade(publica1on(or(web(site(may(be(extracted(or(reproduced( without(permission(of(Palisade.(( www.palisadeGresearch.com((( www.palisadecapitalcorp.com((( www.palisaderadio.com

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