Tuesday, September 12, 2017 Derek Macpherson

Site Visit: AuRico Gearing Up to Initiate Construction

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Last week we visited AuRico Metals Inc.’s (TSX:AMI) Kemess Project in northern British Columbia. The existing infrastructure at Kemess was as impressive as it was a year ago when we last visited the site. Since that last visit the company has checked off major project milestones at Kemess including the receipt of an Environmental Assessment Certificate for Kemess Underground (“KUG”), a signed Impact Benefits Agreement with the Tse Keh Nay First Nations for KUG, a Preliminary Economic Assessment on neighbouring deposit Kemess East (“KE”), and the submittal of permit applications for KUG. The Company has also added key hires to their project management team over the past few months as, pending permits being received in Q2-2018, it will look to initiate construction at KUG by July 2018. As was the case a year ago, we continue to believe Kemess remains undervalued within AuRico.

AuRico is getting ready to break ground at KUG in mid-2018, upon receipt of necessary permits. Earthworks will include road construction, including a tunnel, from the existing plant site to the proposed triple decline portal and initiation of the portal construction. Though the final scope and magnitude of work is yet to be finalized, we believe the budget for a first phase of construction could be in the order of US$30 to US$50 million.

Drilling this summer at KE is likely to lead to an updated mineral resource estimate in early 2018. The majority of the 12,000 m drill program that commenced on July 8th was dedicated for KE (situated 1 km to the east of and ~750m below KUG). The purpose of the drill program at KE is to infill drill and test the outer edges of the known deposit, to the south in-particular. Three of eight, of the ~1,500m deep drill holes were complete at the time of the site visit and two rigs were active drilling the 4th and 5th. The program is expected to be wrapped up by the 2nd week of October. The KE deposit appears to be open to the north, south, and west. A roughly north to south orientated slip fault is located on the eastern margin of the deposit.
Kemess Offset Zone (“KOZ”) may be taking shape, but still very early days. A potential Kemess offset zone can best be described as being “stepped down” from KUG to the east, located between KUG and KE both laterally and vertically. Given KOZ is hypothesized as being the thrust fault offset of KUG, and that an eastern section of KUG contains a high-grade zone where the panel cave is likely to commence, the company is targeting KOZ as a potential higher-grade deposit. A drill hole from the current program targeting KOZ was terminated at 800 m depth, above its target depth due to poor ground conditions, however, there was some evidence of mineralization in the core which was encouraging.

KUG-KE scoping level optimization ongoing with feasibility-level study on integrated development scenario in H2-2018. As the company develops a better understanding of how KE, and possibly KOZ, will fit into a combined operation with KUG, the easier it will be for them to highlight to the market the overall annual production potential, long-life, and potentially enhanced economics of a combined operation with economies of scale versus KUG and KE as stand-alone projects. Tailings capacity remains a key consideration for a combined operation. It was clear during the site visit that the company has a number of options available to them in this regard including dry-stack tailings, increasing the tailings storage capacity of the existing Kemess South pit, and upgrading the existing tailings storage facility (without encroaching on a near-by creek).

Greater Kemess property and region remains underexplored. It was clear from our visit that on the property and beyond the property boundary, especially on the margins of large-scale local faults, is very prospective with potential to find deposits similar to the historic Kemess South, KUG, KE, and KOZ deposits. Some of the juniors in the area that have interesting prospects include Amarc Resources Ltd. (TSXV:AHR) that has Hudbay Minerals Inc. earning-in to their JOY Project 25 km north of Kemess; Finlay Minerals Ltd. (TSXV:FYL) who’s Atty property is located adjacent to AuRico’s property to the north and hosts several Induced Polarization (IP) anomalies due north of Kemess East; and Serengeti Resources Inc. (TSXV:SIR) who’s UDS property is located 4 km east of KE and who recently identified a large, intense chargeability anomaly and is mobilizing to drill test the anomaly this fall.

Current valuation suggests Kemess remains undervalued despite AuRico trading at or near a 52-week high. Using AuRico’s updated guidance the company trades at ~20.1-21.4x royalty EBITDA, roughly in-line peers at 19.5x (2017e EBITDA). This implies the market is ascribing Kemess less than C$20 million in value, which in our view should be worth ~C$100-125 million as compared to stand alone development stage peers. In our view, once permits are in-hand and KUG+KE are combined into an optimized development plan, AuRico should be positioned to unlock this value, providing investors the potential for meaningful medium-term upside through a viability re-rating.

Priced as of close September 8, 2017

Site visit completed by Chad Gilfillan, note completed by Chad Gilfillan and Derek Macpherson

Derek Macpherson | VP Mining Analysis
Chad Gilfillan | SVP
Victoria Ellis Hayes | Associate
Red Cloud Klondike Strike Inc.
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Priced as of prior trading day's market close, EDT (unless otherwise noted).
All values in USD unless otherwise noted

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Company Specific Disclosure Details
AuRico Metals Inc. - TSX:AMI - 1, 2, 3, 4
Serengeti Resources Inc. - TSXV: SIR - 2
Amarc Resources Ltd. - TSXV : AHR - N/A
Finlay Minerals Ltd.  - TSXV:FYL - N/A

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