hartleys note - $2.64 val at spot

Papillon (PIR) - Bigger Share of the Pie

Papillon Resources (PIR) increased its beneficial interest in the Fekola Project to 90% (was 80%) by acquiring 10% of the ordinary share capital in Songhoi Resources SARL from its local partner.

The transaction has been approved by Songhoi’s shareholders and in-country approvals and registrations are completed. Total consideration for the additional 10% comprises US$750,000 in cash and 860,000 PIR shares.

The Company recently released metallurgical test results of >93% average recoveries from a 1.5t representative bulk sample at Fekola.

A Scoping Study is due in the December Q 2012.

Argonaut’s valuation on 10% of Fekola is significantly higher than the consideration. The acquisition is done with little dilution to existing PIR shareholders and is anticipated to increase PIR’s economic interest to 76% at the time of commissioning, assuming the local partner does not sell additional shares to the government.

Argonaut’s initial assessment indicated the existing Resource and exploration upside could support a 4Mtpa operation. Argonaut’s valuation is $1.80, assuming a 4.0Mtpa operation, capex US$300m, cash costs US$701/oz, head grade 2.4g/t, 92.0% metallurgical recoveries, 288koz pa production, US$1,200/oz long term gold price and an 10 year mine life. At spot gold price the valuation increases to $2.64.

Significant Resource expansion at Fekola is likely:

•Fekola remains open at depth and along strike
•Only the northern third of the project has been drilled to 250m vertical depth, the remainder has been drilled to an average of 120m
•Fekola only covers a small part of the 8km Fekola Corridor, where additional discoveries are possible
While the political situation in Mali requires active monitoring in the short term, Fekola is emerging as the most desirable deposit in West Africa owned by a junior gold company on the ASX. With an expanding 3.1Moz Resource, favourable geometry, encouraging initial metallurgical results, highly prospective grounds and established gold producers in the neighbourhood, PIR is well leveraged to further exploration success.