Cline Mining Corporation T.CMK

RBC initiates CMK July 7

[mski]

Company Overview

Cline Mining Corp. is a development and exploration mining company that is primarily focused on ramping-up the New Elk Mine,

which recommenced metallurgical coal production in December 2010. Cline Mining also owns metallurgical coal assets in northeastern

and southeastern British Columbia, gold assets in Ontario, and iron ore and uranium assets in Madagascar. The company is

domiciled in Canada with its head office located in Vancouver, Canada and has a corporate office located in Toronto, Canada. The

company trades on the TSX under the ticker CMK and has a market capitalization of approximately $500 million.

Cline’s key focus and flagship asset is its New Elk coal mine. The company owns 100% of New Elk mine through its wholly owned

subsidiary New Elk Coal Company (NECC). NECC contains 19,468 acres of surface and leased coal rights located on the eastern edge

of the Sangre de Cristo Mountain range of the Rocky Mountains, approximately 24 miles west of Trinidad, Colorada, US. Areas of the

NECC property have been mined since 1951. Mining in the area continued until 1996 when inefficient mining practices along with

weak markets made the mines uncompetitive. The city of Trinidad has historically been a mining and railroad town and provides a

local work force and employee housing.

Cline is currently targeting production and sales of 0.350 million tons of high-volatile metallurgical coal in 2011, and ramping-up

production to a sustainable run-rate of 3.0 million tons per annum (mtpa) during H1 2012. The current mine plan at New Elk purports

producing 3 million tons of metallurgical coal per annum over a 20 year mine life. The company recently signed a long-term

agreement with the Port of Corpus Christi Authority of Texas providing New Elk with a long-term lease and access to the seaborne

export coal markets. The New Elk mine is within 2 miles of the Burlington Northern Santa Fe Railroad (BNSF), which provides

connections to other major rail lines, including access to the Port of Corpus Christi and track rights to ocean ports located in British

Columbia. The New Elk mine has 43-101 compliant, in-place measured & indicated coal resources of 388.5 million tonnes.

While not its key asset, the company has completed a NI 43-101 report for its Cline Lake Gold deposit in Northern Ontario and is

considering future alternatives for this gold asset, including further exploration and development work with a joint venture partner or

alternatively spinning the asset out into a separate gold-focused listed entity. Cline mining also continues with exploration at its

Bekisopa iron ore property in Madagascar, and is also reviewing its options to optimize value of its Lossan met coal project in northeastern

British Columbia. The company has stopped all work on its Lodgepole and Sage Creek metallurgical coal assets located in

southeastern British Columbia following the placement of a moratorium on coal leases in the area by the provincial government

effective February 9, 2010. As discussed in the Valuation section on page 14, with the exception of the Lossan project, we give no

value for Cline’s other non-core assets given that they are early stage. For further details on Cline Mining and its assets, please see

“History & Overview – The Evolution of Cline Mining” section on page 17.

Exhibit 1: Cline Mining Property Locations

Source: Company reports

July 7, 2011 Cline Mining Corporation

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Share Price Drivers

Cline Mining is in the midst of reopening the New Elk Mine. The mine is expected to produce a high-volatile metallurgical coal that

could be sold domestically and into the seaborne market. The company’s goal is to reach a production run-rate of 3.0 mtpa of saleable

coal in H1 2012. Cline has guided for met coal production of 0.350 million tons in FY2011, 2.75 million tons in 2012, and 3.0 million

tons in 2013 and beyond. We outline in the subsections below the company’s overall strategy, potential near-term catalysts,

development timeline, and critical success factors and risks; all of which will have an impact on Cline’s share price

performance.

Corporate Strategy

Cline Mining is focused on becoming a growing metallurgical coal producer. The company’s key near-term objective is to complete

mine and plant rehabilitation in order to ramp-up production at its New Elk Coal project. Over the medium to long term, the

company’s fundamental objective is to produce 10 million tons of clean metallurgical coal per annum from its assets located in the

US. Cline intends to reach this goal through further organic growth at New Elk and through acquisitions of contiguous coal bearing

leases.

In the recent past, Cline Mining had a more broad focus with a goal of becoming a profitable, growth-oriented international producer

of mine product resources. This is reflected in the company’s collection of assets in Canada, the US, and Madagascar, which contain

various commodities including coal, iron ore, uranium and gold. With a new clear focus on its coal assets in the US, the company is

considering various strategic alternatives for its non-core assets. While we attribute a small value for Cline’s Lossan met coal project

(
.19/sh), we attribute no value for the company’s early stage gold assets in Ontario and iron ore assets in Madagascar. We also

attribute no value for the company’s met coal assets in southeastern B.C. given the existing moratorium on those coal leases.

Just as important as restarting production at New Elk, Cline Mining will need to engage potential customers in order to secure buyers

for its product. Metallurgical test work to date indicates that the four coal seams that constitute the mine plan are low-sulphur,

medium-to-high fluidity, high-volatile B bituminous metallurgical coking coals, suggesting that Cline will be able to sell its New Elk

coal into the seaborne market as a high volatile coking coal. A study performed by consultants Wood Mackenzie on behalf of Cline

Mining further supports this conclusion. Nonetheless, the steel mills will need to perform metallurgical laboratory test work and bulk

sampling of their own, and the final determinant of New Elk coal saleability will be in the demand and purchase of their product.

Following the $86 million equity raise announced May 16, 2011, Cline has approximately $86 million of cash on its balance sheet.

With an initial cash balance of $43 million at the start of FY2011 and net proceeds of $81 million from the recent equity financing

deal, the company is well positioned to meet its capex requirements of $110 million in FY2011 and to commence production at the

New Elk mine.

Potential Catalysts and Timeline

Cline mining continues to focus on ramping up and entering commercial production at its New Elk project. In addition, Cline is

actively exploring future opportunities, including the implementation of longwall mining at New Elk and subsequent expansion of

production, divesting its non-core assets, and further M&A activities. We highlight in Exhibit 2 specific milestones that we expect will

have a meaningful impact on Cline’s outlook and share price in the near term.

Exhibit 2: Near-Term Catalysts

Date Event

Summer 2011 First commercial sale of coal

Q3 2011 Study on longwall mining to double production completed

Q3 2011 2nd phase of exploration drilling on southern part of DOW lease

H2 2011 Enter into off-take/sales agreements with steel mills

H1 2012 Achieve production run-rate of 3.0 million tons per annum

Source: Company reports, RBC Capital Markets estimates

In our analysis, we assume that New Elk coal reaches a production run-rate of 3.0 mtpa of clean coal in the first half 2012, has a mine

life of 20 years, and that Cline Mining successfully negotiates off-take agreements with steel mills for its coal production. We

estimate that Cline will sell its initial trial coal at a 25% discount to benchmark premium hard coking coal prices, and that this

discount narrows to 20% beginning in 2013 as counterparties become familiar with Cline’s product. We estimate a life-ofmine

(LOM) average cash cost of US$88/ton FOB port (US$97/tonne), which is split roughly equally between operating costs

and rail/port expenses, and excludes royalty expenses. We also assume that the port of Corpus Christi is able to expand its

throughput capacity as per Cline’s agreement and that Cline is able to ship 3 million tons of clean coal through the port each year.

July 7, 2011 Cline Mining Corporation

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Critical Success Factors and Risks

? Ramping Up Production: Cline commenced production at its brownfield New Elk Coal project in December 2010. The

company’s ability to reach commercial production and ramp-up production to 3 mtpa within one year will drive cash flow

generation and remove development risk and uncertainty.

? First Coal Sale and Locking in Off-take Agreements: We believe this is a key outcome that will act as a catalyst for the shares.

As a new entrant in the seaborne metallurgical coal market with no guarantee of production quantity or quality, buyers are likely to

be hesitant to purchase New Elk coal and/or demand a significantly discounted price to normal benchmark levels. Recording its

first sale and securing an off-take agreement with a reputable steel mill would reduce uncertainty over realized prices and provide

assurance that Cline will be able to sell its coal product into the steel market.

? Coking Coal, But Not Your Typical Product: Coal produced at New Elk will be branded and sold as a high-volatile

metallurgical coal. The trend for coking coal buyers has been to diversify supply and coal quality characteristics, and the fluidity

and low sulphur qualities of New Elk coal will be considered valuable in blends. However, other characteristics of New Elk coal

do not qualify it as a premium coking coal. Specifically, low reflectance, ash content, Composition Balance Index, and volatile

matter result in the coal being classified as a “B” grade metallurgical coal. In addition, the coke strength still remains uncertain,

and this is a key characteristic of coal that cannot be altered or changed through blending with other coals. We have assumed in our

modeling that over the medium to long-term, Cline receives a 20% discount to benchmark low-vol, premium hard coking coal

prices for its coal product.

? Long-wall Provides Growth and Value Creation Potential: Cline is currently studying the potential to double production to 6.0

mtpa by using longwall mining methods in place of room-and-pillar mining. We estimate that longwall mining would cost $200

million to develop, and would likely result in Cline having to raise $60-$120 million in additional finances in 2012. While

longwall mining carries significantly higher capex, if successfully deployed, unit operating costs would decline significantly, and

annual throughput and production has the potential to increase significantly. We note that two of the four coal seams in the current

mine plan (Maxwell and Allen seam) were previously successfully mined using longwall at the Golden Eagle mine. A study on the

feasibility of longwall mining is expected to be completed in Q3 2011; however, a decision may not be forthcoming immediately

as management first focus’ on ramping up production at New Elk to 3.0 mtpa. Assuming that the New Elk coal seams are

amenable to longwall mining and that the mining method is successfully deployed and production increases from 3.0 to 6.0 mtpa,

our NAV increases from $3.01 to $5.57. For further details, see our Upside Scenario found in our Valuation section on page 14.

? Access to Excess Rail Capacity: The Burlington Northern Santa Fe Railroad (BNSF) rail system is located 24 miles from the

New Elk mine and provides the operation with access to potential domestic customers and export coal terminals on the US Atlantic

and Pacific coasts.

? Port Agreement in Place: The New Elk property is located approximately 890 miles (1,430 km) from the port of Corpus Christi.

On February 8, 2011, Cline announced that it had entered into a long-term arrangement with the Port of Corpus Christi Authority

of Texas providing New Elk a long-term lease of 18 acres of land that will serve as a coal storage area. The agreement provides for

an initial five year lease, with the option for Cline to extend the lease for five additional periods of five years. The lease will allow

New Elk to permit, develop, and build their own coal facility to ship coal. The facility can currently support throughput of up to 2

million tons of coal per year and can accommodate panamax vessels carrying up to 70,000 tons of coal. Cline estimates additional

capex of $20 million to upgrade the port to allow for shipment of 3 million tons of coal per annum.

? Metallurgical Coal Prices: RBC’s analysis points to a supportive metallurgical coal price environment over the medium to long

term. In the near term, we expect metallurgical coal prices to ease through the second half of 2011 as supply from Queensland,

Australia, gradually recovers and Chinese buyers remain absent until the spread between domestic and import prices is reduced. In

the medium term, we expect further growth in Chinese steel demand, solid demand from India, and the return to market of

traditional customers to underpin solid demand growth for metallurgical coal. Meanwhile, we do not expect any significant

increases in supply over the medium term, thereby resulting in a generally tight market during our forecast period.

? Unlocking Value – Divesting Non-core Assets: Cline has a number of non-core assets, including metallurgical coal assets in

British Columbia, Canada, gold assets in Ontario, Canada, and iron ore assets in Madagascar. We believe the market is attributing

no value for these non-core assets, and Cline’s ability to monetize any one of these assets through joint ventures or divestitures

would be viewed as an incremental positive. We ascribe a small value in our NAV of
.19/sh for the Lossan project, and no value

for the gold assets in Canada and iron ore assets in Madagascar given that they are early stage.

July 7, 2011 Cline Mining Corporation

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Comparative Analysis

We have compared Cline Mining to the following developing and/or producing metallurgical coal companies in RBC’s global

coverage universe: Aquila Resources (AQA), Gloucester Coal (GCL), Grande Cache Coal (GCE), Macarthur Coal (MCC), Riversdale

(RIV), and Teck Resources (TCK.b). We compare Cline with its peer group based on the following:

? Production trends (Exhibits 4 - 6)

? Resource comparisons (Exhibits 7 - 8)

? Costs (Exhibits 9 - 11)

? Commodity price leverage (Exhibit 12)

? Valuation metrics (Exhibits 13 - 17).

In addition, within our “Resource Comparisons” section that follows we have compared Cline’s New Elk coal quality versus industry

benchmarks.

Summary Results

Cline Mining’s production trends are in line with other junior metallurgical coal producers. However, the New Elk Mine is noticeably

smaller in resource size and a few of its coal characteristics, namely its ash and phosphorous content, and low reflectance, are

associated with a lower quality coal. While the company ranks as the highest cost producer within its peer group, its capex per tonne

of coal produced over life-of-mine (LOM) is close to average. Cline Mining provides investors with superior leverage to metallurgical

coals prices. Our positive outlook for the metallurgical coal market over the medium term provides a constructive backdrop for further

expansion potential at the New Elk coal mine. Exhibit 28 in our “Financial Analysis” section provides our hard coking coal

benchmark price and estimated realized price forecasts for Cline Mining.

From a valuation perspective, the shares appear inexpensive on all valuation metrics, trading below its peer group average.

However, given that there is start-up risk and uncertainty surrounding future met coal pricing, we believe the NAV provides

the best target price until the company has established an operating track record. At that point, we believe an earnings or cash

flow based target multiple becomes the best valuation metric.

Exhibit 3: CMK relatively inexpensive on P/NAV and 2012E-2013E P/E, P/CF and EV/EBITDA basis

Comparative Analysis – Coal Companies

7/6/11

Symbol Stock Current 12-month Total Net Premium Market

& Price Share Target Implied Asset (Discount) Cap

Exchange Currency Price Price Return Value to NAV 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E (US$MM)

Coal

Alliance Resource * ARLP O US$ CP US$77.56 SP AVG US$85.00 14% 10.0x 8.6x n/a 9.2x 8.0x n/a 5.6x 4.8x n/a $2,850

Arch Coal * ACI N US$ CP US$26.62 SP AVG US$40.00 52% 10.8x 9.7x n/a 5.2x 4.9x n/a 5.8x 5.4x n/a $4,324

Cloud Peak Energy * CLD N US$ CP US$21.40 SP AVG US$25.00 17% 12.8x 12.0x n/a 4.7x 4.7x n/a 3.8x 3.7x n/a $969

Coal & Allied ** CNA A A$ CD A$101.49 SP AVG A$110.00 14% A$99.46 2.0% 12.3x 12.9x 15.4x 9.9x 11.7x 13.9x 7.7x 8.0x 9.4x $9,399

Coalspur CPT T C$ RK C$2.03 OP SPEC C$2.30 13% C$2.31 -12.3% n/a n/a n/a n/a n/a n/a n/a n/a n/a $1,193

Consol Energy * CNX N US$ CP US$48.95 OP AA US$62.00 27% 19.7x 11.4x n/a 8.4x 6.0x n/a 9.0x 6.5x n/a $11,200

Gloucester Coal ** GCL A A$ CD A$8.55 SP AVG A$10.00 17% A$10.22 -16.4% 45.4x 14.6x 18.4x 19.8x 10.5x 13.1x 18.5x 6.2x 7.1x $1,284

Grande Cache Coal GCE T C$ RK C$8.86 U AA C$9.00 2% C$7.73 14.7% 31.9x 9.7x 8.1x 14.0x 5.6x 4.6x 15.8x 5.3x 4.6x $902

MacArthur Coal ** MCC A A$ CD A$11.15 SP AVG A$12.00 10% A$10.70 4.2% 22.4x 11.8x 14.5x 22.1x 9.9x 13.4x 10.9x 6.3x 7.7x $3,033

Peabody Energy * BTU N US$ CP US$60.46 OP AVG US$86.00 43% 13.3x 11.0x n/a 7.8x 6.4x n/a 7.2x 6.0x n/a $16,493

Resource Generation ** RES A A$ CD A
.78 OP SPEC A$1.00 29% A$1.60 -51.6% n/a n/a n/a n/a n/a n/a n/a n/a n/a $198

Rhino Resource * RNO N US$ CP US$25.00 OP AVG US$29.00 32% 11.7x 8.0x n/a 6.9x 5.4x n/a 6.5x 4.9x n/a $620

Riversdale Mining ** RIV A A$ CD A$16.20 SP AA A$16.00 -1% A$15.68 3.3% n/a n/a 41.1x n/a 41.6x 20.6x n/a 40.1x 13.9x $4,101

Weighted Average 0.6% 15.8x 11.3x 20.8x 9.4x 10.1x 14.8x 8.1x 8.8x 9.7x $56,569

Cline Mining CMK T C$ RK C$2.39 SP AA C$3.00 26% C$3.01 -20.6% 33.1x 6.6x 5.4x 20.7x 3.9x 3.8x 19.5x 3.6x 2.9x $497

Diversifieds

BHP Billiton *** BLT L UK£ DK £24.71 SP AVG £29.00 19% £23.38 5.7% 9.9x 9.2x 9.2x 7.5x 6.9x 6.9x 5.8x 5.0x 5.0x $216,717

Teck Resources **** TCK.B T C$ HFP C$50.40 OP AVG C$60.00 20% C$54.04 -6.7% 10.0x 11.8x 12.3x 6.7x 7.5x 7.6x 5.5x 6.5x 6.6x $30,834

Analyst

P/E P/CFPS EV/EBITDA

Rating

Risk

*Covered by RBC Capital Markets, LLC analyst Chad Potter, CFA [phone]; [e-mail]

**Covered by Royal Bank of Canada –Sydney Branch analyst Chris Drew, CFA [phone]; [e-mail]

***Covered by Royal Bank of Canada Europe Ltd analyst Des Kilalea ([phone]; [e-mail]

****Covered by RBC Dominion Securities Inc. analyst H. Fraser Phillips [phone]; [e-mail]

Source: Bloomberg, Company reports, RBC Capital Markets estimates