Wellington West: PA Highlights Substantial Challenges to Operating in the James Bay Lowlands

• Preliminary Assessment returns higher-than-expected initial capex.

Major change in project scope to include all-season road and underground facilities causes capex est to increase to ~$600mm (vs. ~$300mm prior).

• Project success largely tied to higher Ni/Cu prices, 3rd parties.

We contend that higher metals prices are key to improving project economics, as would be a material offset to initial capex from a 3rd party.

• Financial model updated to include higher capex, later start date.

Net effect of increased capex, 2018 start date (vs. 2016 prior) and higher assumed equity financing component causes a reduction in NAVPS.

• Lowering target price to $1.50 from $2.50, moving to Spec Buy rating.

Target based on 0.8x (v. 0.85x) our NAVPS10% est. of $1.92 (v. $2.86); expl success, sale of PGM stream and/or reduced capex could boost NAV.

Investment Summary and Outlook

Building resources in a Canadian mineral warehouse. Noront Resources Ltd. is focused on growing a high-grade nickel-copper-PGE sulphide resource in the Eagle’s Nest deposit in the James Bay Lowlands of northern Ontario. The company also has uncovered a related and potentially significant chromite district represented by (among others) the company’s high-grade Blackbird deposits discovered in early 2008. Additionally, a host of yet untested nickel-copper, vanadium-titanium-iron and chromite targets illustrate the substantial geologic prospectivity of the area.

Recently released Preliminary Assessment (PA) returns higher-than expected initial capex costs. With the release of the PA on September 9, 2010, economics at the Eagle’s Nest project came in less favorable than expected owing to higher-than-expected initial capex costs. These can be largely attributed to the specific challenges of operating in the James Bay lowland region and a significant change in project scope that now includes an all-season road to site, power plant in Webiquie with buried transmission line to site, submerged slurry pipeline, and all underground facilities. While Noront has assumed that other parties (including government) may bear some of the cost of the required infrastructure, the net effect in our view entails higher initial capex and potential delays in securing permitting and/or concluding negotiations with appropriate other area parties.

Reducing target and rating. The net effect of our changes outlined herein reduces our NAVPS estimate to $1.92 from $2.86 previously. Our target is based on a 0.8x multiple (vs. 0.85x prior) of our NAVPS10% estimate of $1.92. In light of the additional challenges we see in commercializing the deposit, we are moving our rating from Buy to Speculative Buy.

PA Highlights Substantial Challenges to Operating in the James Bay Lowlands

Location risks come home to roost. As outlined in our initiating report, the James Bay lowlands sphagnum bog poses development and logistical challenges, particularly as it relates to tailings storage and access to both aggregate and dry areas for the construction of surface facilities. A review of available alternatives by the company determined that the most cost-effective solution was for Noront to incorporate certain facilities, including the mill, underground. Furthermore, the company determined that transportation of concentrate by hoverbarge was not cost effective, thus a slurry pipeline was incorporated into the mine design. Other remote costs now include an all-season road from Pickle Lake to Webequie, a winter road from Webequie to site, and a remote diesel power station with buried transmission line to site.

With the change in project scope, initial capex is now estimated at $600 - $625 million, up from our initial estimate of ~$300 million. The new capex estimate assumes cost sharing on some of the infrastructure costs. For instance, the PA assigned 25% of cost of the all-season road, 50% of the power line and 50% of the winter road costs against the Project. Where previously we had envisioned a remote operation with winter road only and fly-in fly-out access, the new project scope entails a more infrastructure-intensive solution. We contend that ongoing negotiations with local First Nations may also be a primary driver for the requirement to include an all-season road as part of the revised project scope.

Financial success of the project in our view is now more dependent on higher metal prices and/or the ability of third parties to fund infrastructure costs. Given the less favorable than expected economics in the PA, we see higher long-term metal prices as one option to improve project economics. Alternatively, we note that other parties, such as the provincial government or Cliff’s Natural Resources (CLF: NYSE; Not Rated) who hold chromite projects in the vicinity may be two parties that could share in a large portion of the infrastructure costs. At this time however the willingness or ability of Cliffs or the government to fund part of the required costs are unknown, thus it could result in additional delays to the project start-date.

Financial Model

We have updated our financial model to include higher initial capex, later start date, and a more dilutive equity financing. Based on the new information contained in the PA, we have revised our financial model with the following major changes. We now assume initial capex of $525mm (including working capital; this compares to ~$300 million under our original remote operation scenario), production startup is now assumed in 2018 (vs. 2016 prior), and the equity component of the required capital has been increased to $213 million (from $98 million prior) at an assumed price of $2.10/share (vs. $3.00/share prior). Our capex estimate ($525mm) is lower than Noront’s (~$600mm) as we assume the pushed back start-up date could allow the company to benefit from a regional infrastructure build-out required to develop other nearby deposits. Lastly, we have reduced the value of our assumed chromite asset valuation to $75 million (from $150 million prior) to account for the delayed startup and higher proportionate share of required capex.

Target Price Reduced to $1.50, Moving to Speculative Buy Rating NAVPS estimate decreases as a result of higher capex and later assumed start date. The net effect of our changes outlined above reduces our NAVPS estimate to $1.92 from $2.86 previously. Our target is based on a 0.8x multiple (vs. 0.85x prior) of our NAV10% estimate of $1.92. In light of the additional challenges in commercializing the deposit, we are moving our rating to Speculative Buy (from Buy). We note the potential for a bump-up in our NAV upon further exploration success, monetization of the PGM stream at Eagle’s Nest, and/or progress on securing a partner to help offset the cost of area infrastructure.