Excelsior Mining Corp (EXMGF)

[Photonics_Guy]

Excelsior - Limited Downside Risk

Whenever I enter into a substantial position in an equity, particularly a developmental project, I look at both the realistic and worst-case scenarios to weigh the risk/reward opportunity and to gauge the potential impact on my invested capital if the worst-case scenario unfolds. While it is fun to look at rosy, optimistic outcomes, but I do not focus on those when evaluating whether to put my hard-earned money on the line. Capital preservation is key.

The opportunity has to have at least a 2X upside for the realistic case. The Excelsior Feasibility Study (FS) for the Gunnison project discusses a base case of $2.75/lb copper:

- Plausible >5X from current PPS at CD$5.16/shr (estimate)
- ATax NPV: US$807M
- ATax IRR: 40%

We also want the opportunity to have downside protection to limit sizable capital losses. What are the downside capital loss mitigators for Excelsior Mining?

A few reasons I believe that Excelsior Mining has limited downside risk.

1. Copper Processing Facility: Nearby copper processing facility (Johnson Mine Camp) is owned by the company and is in pristine condition

2. Permit Approval: Minimal risk of permit approval being delayed or denied
- Substantial local support due to potential for jobs and Excelsior's demonstrated commitment through outreach and communications
- Remote location: 65 miles east of Tucson in the middle of nowhere
- Endorsement, approval and support by local newspapers that are historically anti-mining
- Water Use
--- In-situ Recovery (ISR) uses less water than a conventional mine
--- The majority of water used is recycled
--- A water treatment plant operates on site
- Limited environmental issues due to recovery process (ISR)
--- Minimal noise
--- Minimal dust
--- Minimal emmissions
--- No tailings piles or explosives
--- No potential for acid mine drainage
- Mine closure and reclamation:
--- No permanent scarring of the landscape as with conventional open-pit operations
--- After minimal reclamation, the surface will bear little to no sign of mining activity and will be available for general use
- No organized opposition to project

3. Capital Expense Financing: Minimal risk of obtaining capex financing on favorable terms
- US$47M of initial capex is chump change in this business.
- Will most likely be entirely financed from debt with no shareholder dilution
- Will most likely be in place contingent on permit approval
- Mine construction will likely commence within days of permit approval

4. Production Schedule: Plausible schedule to produce 25M lbs per year of copper in 1 to 1.5 years

5. Sustainable copper price floor: $2.00/lb is a plausible floor for copper pricing
From: Investiv Daily Article
"The price of a commodity can go below the marginal production cost for a while, but can’t stay there for long as sooner or later marginal producers start to idle production or go bankrupt. Therefore, the safest way to invest in cyclical commodities is to look at the cost curve. Copper was an easy call back in April 2016 as about 20% of global copper output had cash costs above $2 per produced pound of copper. And these are only cash costs that don’t include mine depletion costs, exploration costs, equipment depreciation costs, etc. In such an environment, copper prices below $3 per pound are unsustainable as companies aren’t incentivized to invest in new projects. Lack of investments leads to future supply deficits and to higher copper prices. Higher prices eventually incentivize new investments and lead to an oversupplied market, and so the cycle continues. The positive with copper is that the low fruit has been picked and the remaining copper to be mined is deeper, scarcer, and much more expensive to mine."

6. Low-Cost Producer: The Gunnison project will be a low-cost producer with $0.65/lb direct costs and $1.24/lb 'all-in' production costs
- Provides $0.75/lb gross profit at sustainable copper floor pricing

In the event of worst-case scenario (copper at $2/lb):
1. MIN still very profitable (ATax NPV: US$324M; ATax IRR: 21.2%; PPS est: CD$2.13/shr; 2.5X of current PPS)
2. Larger copper producers will be incentivized to acquire low-cost copper operations to buttress their balance sheet
- Creates a high likelihood of acquisition
3. Copper demand will never go away