<TABLE width="100%"><TBODY><TR><TD>Genuity Report /NORONT</TD><TD align=right>
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Noront Resources Ltd.
NOT-V: $0.94 October 23, 2008
TARGET: $2.15 (FROM UNDER REVIEW)
RECOMMENDATION: BUY (FROM UNDER REVIEW)
RISK RATING: SPECULATIVE
Michael Gray, P.Geo. – 604.694.6961
michael.gray@genuitycm.com
Colin Garner, BASc (Associate) – 604.694.6964
colin.garner@genuitycm.com
Noront delivers Eagle One Ni-Cu-PGM scoping study
(all figures in C$, unless noted)
Price (10/22/2008)$0.94
Total return to target129%
Shares O/S (mm)129.9
Shares F/D (mm)139.0
Market cap F/D ($mm)$130.7
Market value ($mm)116.010-day Ave
Daily Vol (K)540.0
Debt ($mm)$0.0Cash ($mm)$30.0FD cash ($mm)$53.012-mo
Burn-rate ($mm)$25.0
Shareholders
2.5% Mgmt
~9.9% Sprott Asset Mgmt
~9.2% Rosseau Asset Mgmt
~7.9% Pinetree Cap
President & CEORichard Nemis
COOJohn Harvey
CFOKevin Feeney
Company profile
Noront Resources (NOT-V) is a Canadian-based and precious metal exploration company focused on Northern Ontario and Quebec, Canada. Its key asset is its Ni-Cu-PGM Eagle One 2.9 million t indicated and inferred resource on its 100%-owned Double Eagle project, James Bay lowlands, Ontario. Massive sulphide resources grade 6.75% Ni, 3.17% Cu, 2.45 g/t Pt and 12 g/t Pd (490K t).
• Eagle One Ni-Cu-PGM scoping study attests to the potential high retained value of the massive sulphide portion of the deposit – A scoping study highlights the economic potential of the massive sulphide resources of the Eagle One deposit as direct shipping ore. The ultra-high grade massive sulphide resources grade 6.75% Ni, 3.17% Cu, 2.45 g/t Pt and 11.99 g/t Pd (in situ 490,000 tonnes). A two-stage underground mining scenario (6.2 years) initially direct-ships massive sulphide resources to a smelter for 1.2 years, followed by mining and onsite milling of disseminated sulphide resources for the next five years. This is preceded by a two-year period of road and mill construction. Noront’s pre-tax NPV10% is $464 million based on the 48-month trailing average metal prices (i.e., Ni $11.00/lb, Cu $2.75/lb, Pt $1225/oz, Pd $300/oz – all US$). Payback is 2.2 years and the pre-tax IRR is 160%.
• Valuation adjustments – We have re-valued NOT in the context of the significantly weaker market we see for exploration companies 12 months out. We have trimmed our expectation that additional Ni-Cu-PGM massive sulphide deposits will be discovered and the value for Noront’s land position. We mainly rely on our preliminary DCF analysis of the Eagle One deposit and scoping study parameters to arrive at a NPV10% of $207 million for the potential direct shipping massive sulphide portion. Our estimation uses the forward curve metal prices (i.e., $5.60/lb Ni, $2.29/lb Cu, $887/oz Pt, $178/oz Pd – all US$, 2012 – start up). With few assays reported to date, the chromite discoveries are difficult to value.
• Catalysts – In the near
term, there is a dissident proxy battle for the control of Noront’s board that will be decided at the October 28, 2008 AGM. Drilling south of Eagle One is key, as any expansion of massive sulphide resources would be of high value to NOT.
• We are now recommending NOT as a BUY (from Under Review), with a new 12-month target price of $2.15 (from Under Review). This target price is underpinned by the Eagle One Ni-Cu-PGM deposit resources, the recent scoping study and our geological rationale. We believe NOT is Speculative and suitable for risk-tolerant investors only.
Genuity Capital Markets
http://www.genuitycm.com
Event and background
On October 21, 2008, before market open, Noront released the results of a preliminary economic assessment study on its 100%-owned Eagle One Ni-Cu-PGM deposit, Northern Ontario. This was a surprise for the market, as Noront had not been guiding that it had completed a scoping level study. We give management full marks for conducting this study, but why not indicate that it was underway and a key milestone?
On July 3, 2008, Noront released a 43-101 compliant indicated and inferred resource estimate, totaling 2.9 million tonnes, as set out in Exhibit 1. This resource was higher than the 2.4 million tonnes that we had estimated in our January 10, 2008 initiation report on Noront.
Exhibit 1: Eagle One indicated and inferred NI 43-101 resource estimate
Source: Noront Resources
Scoping study scenario
The Scoping Study contemplates a two-stage mining operation
• Stage One – an initial 1000 t/day underground operation where the high-grade massive sulphide resources (indicated and inferred) would be accessed by ramp and “directly shipped” presumably by truck +/- rail to a smelter in Sudbury. A two-year period of road construction would be required and then 1.2 years of mining of the massive sulphide resource.
• Stage Two – a 1500 t/day underground operation would follow, with the disseminated indicated and inferred resources being mined and milled on site. This stage of mining would last five years.
The parameters for the scoping study are provided in Appendix A. We note that the 48-month trailing average metal prices were used for the Noront study – i.e., US$11.00/lb Ni, US$2.75/lb Cu, US$1225/oz Pt, US$300/oz Pd – whereas we have used the forward curve metal prices in the Valuation section of this report, which are much lower – i.e., US$5.60/lb, US$2.29/lb, US$887/oz Pt, US$300/oz Pd (in 2012).
Scoping study results
We have provided the results of Noront’s scoping study in Exhibit 2, including sensitivity to the 48-month average trailing prices (36 months and 60 months). This mining scenario is preceded by a two-year period of road and mill construction – no permitting timeline was specified in the news release.
Exhibit 2: Summarized results for scoping study utilizing 36-, 48-, and 60-month average metal prices – See Appendix 1 for assumptions
36-Month48-Month60-MonthAverageAvera... NiUS$/lb$12.50$11.00$10.00CuUS$/lb$3... rateCAD/USD0.90.90.9Pre Tax IRR(%)200%160%137%Pre Tax NPV@ 10%$606m$464m$381mUndiscounted cumulative cash flow $C$931m$719m$595mCapital Paybackyrs2.22.22.3
Source: Noront Resources
Valuation and recommendation
We had taken NOT-V to “Under Review” on October 7, 2008 as our blue-sky driven valuation was not in-step with the likely weak market conditions expected 12 months from now. A dissident proxy battle announced on October 9, 2008 caused us to stay Under Review until now following NOT releasing a scoping study on the Eagle One Ni-Cu-Pt-Pd deposit.
The main changes to our valuation approach, as shown in Exhibit 3, are as follows:
• Preliminary DCF valuation of the Eagle One deposit – in this valuation we used the same parameters as the Noront scoping study, except that in our conservative and base cases we used the forward curve metal prices and US$:C$ exchange ratio (Appendix 1 for parameters and assumptions). Our metal price assumptions rendered the disseminated portion of the sulphide deposit uneconomical; therefore we did not include it and only modeled the massive portion. However, at this time we are allotting $25 million to our base case for future potential of the disseminated portion, should metal prices improve. For our conservative case we only used the massive sulphide portion of the resource, as this scenario would potentially allow fast-track mining without mill site/tailings permits that could significantly delay the project; we also deducted 10% of this value to be more conservative. In our optimistic case we used the 48-month trailing average metal prices that were used in the Noront scoping study for exploitation of both the massive and disseminated resources.
• Cutting our exploration land value – we do not provide land value in our conservative case, but we do in our base and optimistic cases where we use $300/ha (was US$600/ha).
• Ascribing a value to the Blackbird (One and Two) chromite deposits – we use the following:
1) $37 million in our conservative case – this is the approximate EV of Freewest Resources (FWR-V: $0.20, Not Rated) who has intersected significant chromite mineralization;
2) $100 million in our base case – approximately triple the FWR EV; and
3)$635 million in our optimistic case – this is 2% of the potential gross metal value of a 30 million tonne deposit, grading 40% Cr2O3 at long term US$1.00/lb Cr2O3. We believe the chrome mine potential on the Double Eagle project is high, albeit difficult to value, given the early documentation of the Blackbird One and Two deposits regarding potential size and grade (we note a limited number of drill holes with chrome assays have been reported to date). We expect Noront has a good chance of being able to sketch-in +20 million to +40 million tonnes of chromite resources, at average grades of 40% Cr2O3.
Exhibit 3: 12-month corporate NAV for Noront
Overall Adjusted Corporate12 Month NAV ($000's)$M$/Share$M$/Share$M$/Sha reGross Metal ValueEagle One-Massive portion (NPV10%)186.41.29207.11.440.00.00Eagle One-disseminated portion (NPV10%)0.00.0025.00.170.00.00Eagle One - Noront scoping study prices (NPV10%)0.00.000.00.00464.03.22Belt Goodwill Premium Potential New Belt - Chrome potential37.00.26100.00.69635.04.41Land Transaction Comparables Regional Double Eagle (66.9K ha @ $300/ha)0.00.0020.10.1420.10.14Appraised Value (expenditures @50%) Other Projects (does not including Windfall Lake)0.00.0010.00.0710.00.07Subtotal of Project Assets223.41.55362.22.521129.17.84Cash & Short Term Investments30.00.2130.00.2130.00.21Cash via exercise of in-the-money warrants/options3.70.033.70.0323.00.... exploration rebate3.30.023.30.023.30.02Debt0.00.... (5mm flow-thru shares at $1.08)5.40.045.40.045.40.04Corporation Adjustments (12 mo)-25.0-0.17-25.0-0.17-25.0-0.17Net Corporate Asset Value ($C)240.81.67379.52.641165.88.67using 144mm shares f/dOptimistic Case2.9mm tConservative Case0.49mm tBase Case2.9mm t
Source: Genuity Capital Markets estimates
To value Noront at this time we use the mid-point value of the conservative and base cases for approximately $310 million ($2.15/share). We believe this provides an anchor valuation for the direct shipping ore, while not providing full value to the disseminated ore until the economics become clearer (as we prefer to limit the permitting requirements at this stage).
Recommendation
We are now recommending NOT as a BUY (from Under Review), with a new 12-month target price of $2.15 (from Under Review). This target price is underpinned by the Eagle One Ni-Cu-PGM deposit resources, the recent scoping study and our geological rationale. We believe NOT is Speculative and suitable for risk-tolerant investors only.
416.603.6000 4 Genuity Capital Markets
http://www.genuitycm.com 416.603.6000 5
Impact – Positive
Our forward curve metal price assumptions for the massive sulphide portion of the Eagle One resource suggest very high value can be potentially returned from rather small deposits (0.5 million tonnes) via direct shipping to a smelter. This supports our overall investment thesis that in a new underexplored belt such as the one NOT controls, only a few such ultra high grade Ni-Cu-Pt-Pd massive sulphide deposits may need to be discovered to create significant value.
Near-term catalysts
• Dissident proxy vote at the AGM (October 28, 2008) – As we wrote on October 10, 2008 in a research note, we believe the Rosseau nominated board, if elected, would be a positive development for NOT investors.
• Exploration “expansion drilling” at Eagle One (current) – as written in our October 7, 2008 research note, NOT is drilling immediately south of its Eagle One Ni-Cu-PGM deposit (indicated and inferred resource) in an attempt to expand the deposit and find new massive sulphide zones at depth within the “conduit.” Infill drilling is also being conducted within the inferred resource. Drilling has apparently been in progress since early-to-mid-September with no visual results reported to date.
• 43-101 Preliminary Economic Assessment report (within 45 days) – Noront has indicated the detailed scoping study will be public in 45 days.
• Ongoing drilling at Eagle Two (AT2) and AT12 (ongoing) – Drilling will continue to test at depth for Ni-Cu-PGE massive sulphides. Drill targets associated with high quality EM conductors at depth will have high discovery potential (to date, NOT management has provided limited public information on the quality of its EM targets).
• Ongoing drilling and assay results at the Blackbird One and Two chromite deposits (ongoing) – NOT is sketching-in its two chromite discoveries to establish size and grade potential that will eventually lead to an inferred resource estimation.
• VTEM airborne survey results (pending) – We expect VTEM anomalies to be documented on Noront’s extensive Double Eagle property and for high priority targets to emerge. Disclosure of the strength of these conductors would assist the market in assessing the exploration potential for near surface Ni-Cu-PGM deposits.
Genuity Capital Markets
http://www.genuitycm.com 416.603.6000 6
Appendix 1 – Parameters and assumptions
Noront Scoping Study for the Eagle One Deposit
• 1,000 tpd stage one underground mining operation (ramp) to directly ship the massive sulphide resource to Sudbury over a period of 1.2 years.
• 1500 tpd stage two underground mining operation (ramp) to mine and then mill the disseminated resource, produce a concentrate and ship to Sudbury over a period of five years.
• Assume two-year period for road construction.
• Average estimated on site operating costs for the project include mining $69.00/tonne, processing $37.00/tonne and G&A $11.00/tonne, for a total of $117.00/tonne.
• Mining dilution was estimated at 15% and mining recovery at 95%.
• The base case NSR calculation was derived from metal prices of US$11.00/lb for Ni, US$2.75/lb for Cu, US$625/oz for Au, US$1,225/oz for Pt, US$300 for Pd and US$11.50 for Ag, at a C$/US$ exchange rate of $0.90.
• Process recoveries to concentrate were estimated at an average of 85% for Ni, 97% for Cu, 65% for Au, Pt, Pd and Ag at average concentration ratios of 4:1 for Ni and 9:1 for Cu in massive sulphide and 16:1 for Ni and 45:1 for Cu in disseminated sulphide.
• Concentrate shipping was estimated at $130/tonne and smelter treatment charges at US$130/tonne for Ni, and US$150/tonne for Cu concentrates.
• Smelter payables were 92% for Ni, 97% for Cu, 90% for Au, 65% for Pt, 70% for Pd and 90% for Ag. Refining charges were US$0.50/lb for Ni, US$0.10/lb for Cu and US$15/oz for Au, Pt and Pd and US$0.30/oz for Ag.
• The potentially mineable portion of the resource for Eagle One was estimated on the basis of approximate US% four-year trailing average metal prices of $11.00/lb nickel, $2.75/lb copper, $625/oz/gold, $1,225/oz platinum, $300/oz palladium and $11.50/oz silver and the US$ exchange rate was $0.90.
• An NSR cut-off of $117.00/tonne for underground mining, milling and G&A was utilized to report the potentially mineable portion of the resource
Genuity DCF model assumptions
In addition to the Noront Scoping Study assumptions, we used the following:
• One year to permit the direct shipping operation, followed by a two-year construction period for the road.
• Forward curve metal prices as of October 20, 2008 for our conservative and base case (see Exhibit 4).
• $60 million capital cost for the road construction and ramp development and equipment.
• 10% discount to NPV adjusted 12 months.
Genuity Capital Markets
http://www.genuitycm.com
Exhibit 4: Genuity metal price assumptions as of October 20, 2008
2008E2009E2010E2011E2012E2013E2014E & LT Gold (US$/oz.) SPOT871 797815847882918918 Silver (US$/oz)14.88 9.439.629.9110.3710.8310.83 Copper (US$/lb)3.29 2.212.242.272.292.291.75 Nickel (US$/lb)9.68 5.045.325.505.605.608.00 Platinum (US$/oz)1,587 887 887 887 887 887 1500 Palladium (US$/oz)349 178 178 178 178 178 325C$/US$0.95 0.84 0.84 0.84 0.85 0.85 0.88
Source: Bloomberg, Genuity Capital markets
416.603.6000 7 Genuity Capital Markets
http://www.genuitycm.com 416.603.6000 8
Member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund,
Participating Organization of the Toronto Stock Exchange and Toronto Venture Exchange
A portion of the travel expenses for a recent trip to an exploration site in Ontario were paid for by Noront Resources Ltd.
Analyst’s Certification
I, Michael Gray, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
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Genuity Capital Markets
http://www.genuitycm.com 416.603.6000 9
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