Papillon Resources

Papillon has been one of the best-performing gold explorers this year; which is of little surprise given its success at the now 90%-owned Fekola project in Mali. The maiden resource estimate (MRE) beat expectation, which when combined with regular, positive news flow since has seen the share price up 180% year-to-date.

Fekola Gold Project -- Mali
Papillon holds a 90% interest in the Fekola project in western Mali, approximately 50km south of Randgold’s Loulo mine. The July 2012 MRE was based on drilling to a depth of 250m along 2km strike of a 25km-long target. The company delineated 0.93Moz of gold contained in the indicated category and 2.21Moz are contained in the inferred category. The near-surface resource totalling 3.14Moz is an impressive achievement for an MRE which, with today’s drilling results, points to potential for further exploration success at depth and along the remaining 23km strike.

The Way Forward -- M&A Target Or Mine Developer?
Given the proximity to significant producing mines, we expect Papillon to advance on one of two paths: firstly, the project with all its potential exploration upside could be advanced through feasibility studies and if proven economic, developed to production. Secondly, at some point in this process we would expect that the project will attract the attention of Randgold, Anglo Gold and IAMGOLD, all of which operate along strike from Papillon and could be possible acquirers.

Valuation: Resource Upside Drives Premium Rating
Papillon is valued at US$137/oz on an EV/Resource basis, which appears expensive versus ASX explorers (averaged at US$85/oz August 2012). However, in our mind this premium is in part justified by the perceived exploration upside and may additionally be stimulated by market M&A consideration. If we disregard the pricing in of M&A premiums, the market appears to be pricing in significant expansion of the resource to approximately 5Moz. Papillon offers exposure to gold in a locality dominated by producers including Randgold, which trades at approximately US$280/oz.

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