RE:Research Capital review on explorationMINING EXPLORATION – ASSAY DELAYS CAUSING HEADACHES FOR EVERYONE The Cause and Effect of Major Assay Delays in the Mineral Exploration Industry After a prolonged bear market, the mineral exploration industry began to show signs of life in late-2018. Aside from a brief correction in Q1/Q2 2020 due to the onset of COVID-19, the equity market for junior exploration continued increasing until late-spring 2021. As the market improved, exploration companies raised funds to explore their projects. However, for a number of reasons discussed below, the services that are required for exploration (drilling, assaying, geophysical surveys, geologists, etc.) became more challenging to secure and results began to take longer to receive. One of these issues, longer assay turnaround times, continues to be problematic and has created significant issues for exploration companies and will likely continue to do so for the foreseeable future. In this document we discuss some of the root causes and the major impacts of the slowdown in assay turnarounds. We also provide our advice to both investors and exploration companies on how to both invest and explore in this challenging environment. Exploration is a Science – it Cannot be Rushed We believe it is very important that both investors and exploration company management understand that exploration is a science that cannot be rushed – the consequences of trying to accelerate an exploration program by skipping necessary steps can often result in a program that generates little to no incremental value. A properly planned exploration program should always be prepared (it is not always that case!) and the plans should be followed, even if the people or equipment are not immediately available one may have to wait. Proper geological mapping, structural mapping, geophysical surveys and other related activities are extremely important when developing a proper mineral resource/reserve and should, therefore, receive significant time and attention at all stages of exploration. Advice for Investors in Exploration Companies Investors, as a group, are very focused on drill results from exploration programs. This is understandable as most of the other exploration activities (soil sampling, geophysics, mapping, etc.) are not as well understood and don’t provide results that they can relate directly to the target mineral content (i.e. drill results demonstrate the location and concentration of minerals/elements whereas the precursor activities generally do not). Therefore, investors often press the management of exploration companies to drill as soon as possible. We advise investors to have patience and insist that the companies in which they invest carry out the best exploration program possible, even if it requires significant delays due to problems in the industry as we are currently experiencing. Advice for Exploration Companies We are well aware of the pressure that exploration companies are under to deliver results (usually drill results) to investors. However, if a drill program is rushed because the required services are unavailable, the results could be disastrous. A rushed program often produces poor results. If the poor results are all investors have to judge the investment merits of a company – there is a good chance they will sell the shares. This, in turn, can put downward pressure on share prices making it more costly (through dilution) to raise future financings – if that is possible. Therefore, we recommend that the management of exploration companies move at the pace that is appropriate in the current environment and not sacrifice the quality of an exploration program in the name of speed or appeasing investors. Additionally, in our view, an alternative strategy is not twinning old, successful holes simply to put out results. Conclusion The delays and supply constraints that are currently being experienced in the exploration industry are causing significant problems for exploration companies and investors. However, we are encouraging both groups to have patience and for exploration companies to explain the delays and implications to their shareholders and assure them that the exploration plans are sound and that the monies allocated to exploration will be spent judiciously and not used for a rushed, incomplete program. MINING| SECTOR UPDATE Friday, September 03, 2021 2 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. ASSAY TURNAROUND TIMES AND THE IMPACT ON THE EXPLORATION SECTOR There are many activities which occur during the exploration for minerals including: geochemistry, geophysics, mapping, outcrop sampling, channel sampling, drilling, downhole geophysics, etc. Many of these activities require assays of rocks from grab samples, channel samples, panel samples, reverse circulation cuttings and drill core. It is not exaggerating to say that the assay labs that determine the elemental contents of samples are crucial to the exploration process. When there are problems with the assay processes, there are likely going to be problems with exploration programs. These problems can range from a greatly slowed assay process to drill programs that are not properly defined and/or targeted due to a lack of information. Putting these issues together, and we are seeing a problem for the junior exploration sector which relies so heavily on news flow to remain relevant to investors. We have seen assay turnaround times (the time from submitting the assay to receiving the results) increase dramatically over the past year or more. Where turnaround times were once two to six weeks (sometimes longer depending on the complexity of the sampling required), they are now eight to 12 weeks (according to the exploration companies). The Impact Below we summarize some of the impacts that the delayed assay turnarounds are having on the exploration industry: Drill Results Timing In Canada, the exploration season is a very important time for junior exploration companies and investors, alike. It typically starts in the spring when access becomes possible and continues well into the fall (and very often through the winter). Where previously, once half cores (drill core is sawn in half and one half is submitted for assaying) are delivered to the assay lab, the results were usually available in approximately one month which implies that once drilling commences (assuming it is a large enough program), assays results can be reported almost monthly. However, when the turnaround time starts to approach two to three months, the results are likewise delayed. This creates a problem for junior exploration companies that rely on a fairly constant news flow to keep investors interest. Without investor interest, shares are sold and share prices weaken. This is bad news for all involved. Drill Targeting Some deposit types provide very little to no visual indication of the target minerals contained in a sample. A gold deposit with no visible gold usually requires assays to determine, with accuracy, the gold content of drill core. Therefore, field geologists often rely on the assay results of the last round of drilling to properly target the next set of holes and optimize the exploration program. For companies drilling base metal deposits, the problems are not as pronounced as most base metal deposits exhibit sulphides that are readily observable, measurable (to a degree) and can allow for drilling to continue without delays. However, some base metal deposits have zones of high precious metals and low sulphides which could be overlooked by visual inspection. MINING| SECTOR UPDATE Friday, September 03, 2021 3 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. Figure 1. Drill Core from Palladium One’s Tyko Project (6.6% Ni, 3.7% Cu, 1.5g/t PGE over 3.8m) Note: the sulphides are very obvious in this drill core and assaying would not be absolutely required to target follow-on drill holes. Source: Palladium One Mining Inc. Figure 2. Photo of Gold Bearing Zone from Great Bear’s Dixie Project Note: the gold in this sample is not visible to the naked eye and would require an assay to accurately determine the gold content Source: RCC Previously, a geologist could send samples to the assay lab and get results in a few weeks which would allow for the drill program to continue without any material disruptions. But, when the turnaround time increases to weeks or months, the information necessary to target the next set of holes can be lacking and this can result in poorly targeted drilling that can miss MINING| SECTOR UPDATE Friday, September 03, 2021 4 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. the mineralized zones – this is not only a waste of money, but poor results can drive down share prices and result in excessive dilution when the company needs to raise funds for future exploration. Adding to this pressure is the demand for drill rigs as drillers cannot wait with their drill on one site waiting for assay results. This adds to the pressure for exploration companies to make use of drill rigs while they are available as securing a drill rig for a future program can be quite challenging in today’s environment. Grade Control Drilling While this note focuses on exploration, producing mines are not necessarily unaffected by the assay timing problems. In an active mine, grade control drilling is carried out in advance of mining to better delineate ore and waste. These are often closely spaced drill holes that provide a higher level of detail than exploration drilling so that the boundaries between ore and waste can be defined and so that the grade of the ore to be mined can be more accurately determined and waste can be avoided. This also allows for reconciliation of the reserve model with the actual grades and tonnes mined. As stated by Alwyn Annels in “Mineral Deposit Evaluation”: “Perhaps one of the most important applications of sampling during the exploitation phase is in grade control, i.e. the regular monitoring of face grades in active stopes, or bench grades in an open-pit, or of broken rock being trammed or trucked as waste or mill feed. It is thus used to assess when a stope is exhausted, when a drive on lode has penetrated beyond the limits of ore-grade/ mineable material and whether the material being sent to the mill is still of economic grade. Sampling will also aid blending of ores from different stopes, or portions of a pit bench, to ensure constancy of mill feed.” Many large mines and large mining companies have their own labs to assay for grade control. However, smaller companies may be reliant on third party assay labs and delays in receiving assays can cause serious problems as slowing or stopping mining is usually not an option. Drivers of the Problem Demand The simplest explanation for this problem is that the mining industry was in a bear market for many years and the investment in support services (such as assay labs and drill rigs) was limited. With the more recent bull market, drilling activity has increased significantly and, as one would expect, the volume of assays has increased in tandem. With all other factors remaining the same, one would anticipate that the increased demand alone would increase turnaround times. Labour Shortages When speaking to a number of companies that provide assay services, most noted that a shortage of labour was a major driving factor behind the assay lab turnaround time increasing. According to those we spoke with at assay labs, approximately 70% of the labour force in an assay lab is unskilled (mostly employed in the assay preparation part of the process). However, according to those running assay labs, with competition from other parts of the mining sector and the money made available by the government during the COVID pandemic through CERB and CRB, they have had trouble finding and retaining workers. This shortage of labour is not only being felt by the assay labs. Exploration companies compete for the same labour pool in mining camps and these companies are also finding it challenging to get the workers they need. One assay lab reported that some exploration companies can’t find people to cut drill core before it is sent for assaying and are sending whole core – this is considered very poor practice. Additionally, many of the drills required for exploration are unavailable so some companies are resorting to use specialty drills that produce either very narrow or very wide core – again, not an ideal situation. Some assay labs indicated that they have increased what they pay their unskilled workforce, but it has not produced the results they had hoped for. This is especially problematic as the assay labs have a limited ability to pass the extra costs on to the exploration companies and, with a 10%-20% margin, there is little room for these companies to increase salaries (recall that these companies typically rely on strong exploration markets to make up for the bear markets when business can slow dramatically). COVID The COVID pandemic has also been a major obstacle for assay labs to operate at peak capacity/efficiency. Like all businesses, COVID has resulted in lockdowns, reduced staffing for social distancing and, for some, a reluctance to work due to concerns about contracting the often-deadly disease. MINING| SECTOR UPDATE Friday, September 03, 2021 5 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. Examples of the Problem On August 17, 2021, Magna Mining Inc. (TSXV-NICU) reported that it had submitted 2,228 samples for assay and had only received 426, leaving 1,802 outstanding. Manga noted that “the issue has been discussed with senior management at the assay provider and attributed a high turnover in assay lab staff.” On July 29, 2021, NuLegacy Gold Corporation reported “The backlog for gold assays and multi-element geochemical results which the mining industry is currently experiencing is delaying our ability to update our geological and geochemical interpretations model for the Rift Anticline target in order to improve vectoring and targeting for the next drill holes. Consequently, having completed seven of the planned holes, NuLegacy has reduced the number of core rigs drilling at the Rift Anticline to allow time for the laboratory to catch up and provide the assay results, particularly the multi-element geochemical analyses that assist in vectoring, so that we can better determine the next stage of drilling. The remaining core rig has just commenced drilling hole RA-2021-10 as noted in the above linked map with a targeted drill depth of 3,940 feet. Once the gold assay and multi-element geochemical results from the currently completed holes have been received, interpreted, and integrated into NuLegacy’s geologic/geochemical model we will determine the final set of holes to be drilled within the Rift Anticline in the 2021 drilling program.” On June 8, 2021, Novo Resources Corp. said: “It is expected that the backlog of outstanding assays will be processed by August 2021 at which point the Company can achieve a sample assay turnaround time that will proactively support mining operations.” On April 29, 2021, Ero Copper Corp. reported “At NX Gold, our exploration programs are progressing according to plan. We currently have 10 drill rigs operating in the district focussed on extending the known mineralization of the Santo Antonio vein, identifying new veins within and adjacent to the mine’s infrastructure and conducting the first regional exploration drill programs on identified structures between two and 20 kilometers away from the mine. While we are excited about the early stages of the program, at this time there is a significant backlog of available fire-assay results due to third-party assay lab closures in Brazil during Q1 2021. We anticipate being in a position to provide results during our next exploration update.” On August 18, 2021, Freegold Ventures Limited reported: “Assay reporting remains slow, largely as a result of the backlog at the preparatory facility in Fairbanks as all samples are prepped in Fairbanks prior to being shipped to either Reno or Vancouver for analyses” On July 13, 2021, Galleon Gold Corp. stated “We are also pleased to report that we have now received all assays needed to complete the modelling of the main mineralized areas on the Project as required for completion of the PEA. Progressively longer turnaround times at the labs – typical of the mining industry over the past year or so – have delayed completion of the gold results portion of the West Cache database. Moving forward, the Company has been advised that work over the next 7- 8 weeks will be required by P&E Consultants in order to complete the required analysis and write-up to produce preliminary PEA results now due in early September.” THE IMPACT OF SLOW ASSAY TURNAROUND TIMES There are many potential impacts of the slow assay turnaround times, some of these include: Slower Exploration Programs For some companies, the obvious solution to the problem with assay turnaround times is to simply slow down their exploration efforts so that full assay information is available before proceeding (as required). This is less likely an issue for companies carrying out infill or definition drilling, but it can still cause problems (e.g. for some deposits, assays are needed to tell when one is both in mineralization and out of it – therefore, defining the boundaries of a deposit may be more challenging in this case). Slowing an exploration program to keep pace with the assays is a responsible way of managing the problem, but is best for companies with well developed exploration projects and the cash balance to wait. MINING| SECTOR UPDATE Friday, September 03, 2021 6 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. Change Exploration Plans If a company has multiple projects of multiple drill programs on a single project, management can change how it plans exploration programs in such a way to accommodate for the slower assay results. Pay for Rush Assays If an exploration project requires a small batch of assays very quickly, it can still get rush assays performed by a lab, but at a very significant cost increase. This does not solve the problem as the number of assays is limited and the costs can be quite high. It does, however, offer some mitigation of the problem. Carry on Like Nothing is Happening While we have not seen any direct evidence, there is the temptation for some companies to continue with a drill program without assays to help site the holes in the best manner possible. This may result in very poor results should the drill campaign continue and, accidentally, step outside of the mineralized envelope resulting in many NSV (no significant values) assays. For junior companies that rely on drill results to maintain their market valuation, this could be disastrous. ADVICE FOR INVESTORS The process of mineral exploration is a science where shortcuts are almost always not available or if taken can result in suboptimal results. Certainly some geologists are better or more experienced than others and have had the benefit of past successes and failures, but the processes exploration geologists should follow do not vary significantly. To define a suitable drill target requires many activities to happen in advance including: high-level mapping, detailed mapping, soil surveys, geophysics, structural mapping, reviewing past exploration work (if available) and then compiling all of these to develop proper drill targets. Without this process being carried out properly, the quality of the following drill program may suffer. We recommend investors take the time to both understand and appreciate the problems created by extended assay turnaround times. Patience will be key for investors and they should anticipate slower than expected news flow as exploration companies adapt to the problems described above. Putting pressure on companies to drill and produce results may have the unintended consequence of forcing a pre-mature, poorly planned drill program which generates poor results. In our view, delayed results are almost always better than a sub-optimal drill program that can produce unwanted results. We have already witnessed these problems firsthand with some of the companies. Investors have been loath to wait for the drill programs to start and have pushed for management to drill, even when the underlying work to properly develop drill programs has not yet been carried out. As a consequence, some of the drill results have been less than stellar and we believe they could have been better if the proper time had been taken. Therefore, we advise investors to insist that the companies in which they have investments take the time required to execute the science of exploration without undue time pressure as we believe it will ultimately result in better results and improved share price performance, over time. ADVICE FOR EXPLORATION COMPANIES We understand the pressure exploration companies are under to generate results – the equity market thrives on news flow, especially from exploration companies that have little else material to release. However, a failed drill program as a result of not following the science of exploration and all of its necessary steps, may result in a lower share price, reduced ability to raise further exploration funds and loss of investor interest. We encourage exploration companies to be open and honest with their shareholders about the delays plaguing the industry and we believe the best course of action for exploration companies is to take their time and carry out the best exploration strategy possible – not the fastest. MINING| SECTOR UPDATE Friday, September 03, 2021 7 This report has been created by analysts who are employed by Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report. RELEVANT DISCLOSURES APPLICABLE TO COMPANIES UNDER COVERAGE 1. Relevant disclosures required under IIROC Rule 3400 applicable to companies under coverage discussed in this research report are available on our web site at www.researchcapital.ca ANALYST CERTIFICATION I, Adam Schatzker, certify the views expressed in this report were formed by my review of relevant company data and industry investigation, and accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not related to specific recommendations or views expressed in this report. Research Capital Corporation publishes research and investment recommendations for the use of its clients. Information regarding our categories of recommendations, quarterly summaries of the percentage of our recommendations which fall into each category and our policies regarding the release of our research reports is available at www.researchcapital.com or may be requested by contacting the analyst.