P H I L I P P I N E S

Abacus Securities Corporation

Company Update

United Paragon Mining

24 Karat
Background. United Paragon Mining Corp. (UPM) has been contemplating reopening its Longos gold mine in Paracale, Camarines Norte for some time. The Ramos family, however, has been very busy with the rehabilitation of UPM's sister company, Atlas, for the past 4 years. With Carmen Copper, now firing on all cylinders, the Ramoses are now focused on bringing Longos back on line. The mine started out as an open pit operation in 1988 but shifted to underground mining in 1994. When gold fell below $300 per oz. toward the end of 1998, management decided to shut operations and the mine has been on care and maintenance ever since. Mining Bust. Back in the 1970's, mining and oil stocks dominated the stock market. Their number, however, thinned out through the next two decades as commodity prices fell, forcing the closure of several mines and discouraging exploration activity. Interest in the sector was dampened further when the Supreme Court ruled that the Philippine Mining Act of 1995 was unconstitutional. This discouraged investments in mining and oil exploration, delaying the development of these vital industries. Mining Boom. Fortunately, the Supreme Court reversed itself in December 2004 and upheld the validity of the aforementioned law. At around the same time, commodity prices (especially that of gold, copper and oil) had begun to trend higher although most listed mining and oil companies remained operationally unprofitable that year. Nearly seven years later, commodity plays are again the hottest game in town. Year-to-date, the mining sub-index has outperformed the composite index by a whopping 66.4% (chart 1). This has been on the back of record profits at Philex and Semirara, all-time highs for gold and copper prices, and renewed interest from foreign miners to operate in the country. Export figures (chart 2) and loan growth data (chart 3) show additional evidence that the sector is booming. We believe, in fact, that the Philippines is in the early stages of a mining renaissance that should extend through the rest of this decade as a result of rapid growth in China and other BRIC/emerging economies. Best Buys. Days after the SC reversed its position on the Mining Act, the only mining stock we advised buying was Philex which was trading at P1.06 per share at the time. Since then, the stock has surged by over 2,000%. In 2005, we urged clients to subscribe
Valuation Table Net revenues (Pm) Net income (Pm)* EPS (P) EPS growth (%) PER (x) EBITDA (Pm) Ebitda margin (%) EV/EBITDA (x) Yield (%) 2010 0 -35 2011f 0 -60 2012f 0 -100 2013f 778 509 0.002 n.a. 17.5 535 69% 18.9 0.0% 0.003 8.0 2014f Share Data 4,596 52-Week High/Low (P) 3,138 Relative Performance (%) 0.010 516% 2.8 3,568 78% Shares outstanding (b) 2.8 Market Cap'n (Pm)* 0.0% 3mo. Ave. Daily T/O (Pm) 0.013 Major Shareholders (est.) 2.1 Ramos group Free float 275.1 7,428 8.6 0.028 / 0.010 (1m) (3m) (6m) (12m) +80% +78% +94% +96%

Buy
Initiating Coverage

P0.027
Price as of September 19, 2011

P0.045
12-month Target 67% Upside

September 19, 2011 Report Date 4,308 PSEi

UPM.PS Reuters Code UPM.PM Bloomberg Code UPM Stock Exchange Code

(0.000) (0.000) (0.000) n.a. neg. n.a. n.a. n.a. 0.0% 0.002 13.7 neg. 0.0 n.a. neg. n.a. n.a. n.a. 0.0% 0.002 12.6 neg. 0.0 n.a. neg. n.a. n.a. n.a. 0.0% 0.002 14.7 neg. 2.1

Nicky S. Franco Head of Research (63.2) 667-8900 L2056 [email protected]

Book value/share PBV (x) ROE (%) Net debt/equity (x)

88% 12%

59.2% 116.9% 1.2 0.3

Source: Company, Abacus estimates

United Paragon Mining

September 19, 2011

Chart 1: PSEi and Philippine Mining & Oil Index, YTD Change
100% 80%
68.50% 60% 40% 20%

0% -20%
Jan-11 Mar-11 PSEi
Sources: Bloomberg

2.10%

May-11

Jul-11

Sep-11

Mining and Oil Index

to Semirara's secondary offering which was offered at P36.00 per share. Since then, SCC has jumped nearly 500%. We then recommended Atlas for the first time at P5.90 per share back in February of 2006. It recently went to a high of P25.20 (+327%). Most recently, we put out a Buy rating on LCB when it was at P0.53. It nearly quadrupled to P1.90 in less than six months. The common thread here was that we wanted to give investors a chance to buy a stock that we believed was poised to take off. One or two bets took longer to pay off but all four eventually turned out to be multi-baggers. With the same premise in mind, we initiate coverage on UPM with a Buy rating. Exports of Mineral Products, year-on-year growth
200% 150%

100% 50% 0%
-50% -100%

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Sources: National Statistics Office

The Rehab. As mentioned above, the company's major shareholder is now focused on bringing Longos back to production. A management team is being assembled, initial work on feasibility, a PMRC compliant resource statement and technical/design elements have begun, and various financing options are being considered. The mandate to raise the required $40-50 million, in fact, may be awarded soon to a major international investment bank. This will ensure that funding for the project will be in place in about 6 months, just

Abacus Securities Corporation

United Paragon Mining

September 19, 2011

in time for the projected start of the actual/physical rehabilitation. Major components of the rehab include: 1. Driving a 1.6 km decline under the existing known gold veins. The equipment is already available and will be purchased from Carmen Copper (which will not need to develop its own underground mine for the foreseeable future). 2. De-watering and clean up of the underground shafts and tunnels. Management said the flooding at Longos is a mere fraction of the water in the Carmen underground and can be solved by adequate pumping. 3. Purchase and installation of a 1,000 ton per day (TPD) mill. The equipment will be all brand new except for the refurbishment of four 1-megawatt generator sets that will provide backup power. With the funding, the necessary equipment in place or readily available from suppliers, the small scale of the project, and the ability to source power from the grid, UPM foresees a relatively short wait between now and initial production. Management projects, in fact, that commissioning could begin in about 18 months with full production being achieved after another 6 months. Growth in Loans Outstanding, Universal and Commercial Banking System
Total Loans
25% 20% 15% 10%

Sectors
350% 300% 250% 200%

150% 100% 50%

0% -50% -100% Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

5%
0%

Total Loans Hotels & Restaurants

Sources: Bangko Sentral ng Pilipinas

Mining & Quarrying Electricity, Gas & Water

Pure Gold. Historical drilling data from 144 diamond drill holes and extensive underground sampling lead the companys geologists to believe that there is a global resource of 3.16 million tons of ore with an average grade of 10.89 grams per ton of gold (cut-off grade of 5.00 grams per ton). Of this tonnage, 2.82 million would be in the Measured and Indicated category according to JORC standards, containing nearly a million ounces of gold. This is the resource that UPM hopes to exploit over the next 7-10 years. At 600 tons per day, 10.0 grams/ton and 92% recovery, Longos should produce nearly 65,000 oz. of gold in its first full year of operations. Tonnage and gold production should steadily improve in the years going forward as cash flow from operations enables the company to drill more holes, find more gold veins and boost resources. Eventually, management hopes to mill 1,000 tons of ore per day resulting in >115,000 oz. of gold, nearly the same amount produced by Philex today. The one advantage of UPM over both PX and Lepanto (when it eventually starts producing from Far Southeast), however, is that it will be a pure gold play unlike the other two that will produce gold together with copper in a ratio of roughly 50:50.

Abacus Securities Corporation

United Paragon Mining

September 19, 2011

Valuation. Given its past production history, and historical costs that have been updated to reflect current prices, the JORC-compliant resource statement, and the short time frame to initial production, we believe it is appropriate to value UPM using an NPV approach. The major assumptions are as follows: 1. We pegged ore production at 600 TPD for the first two years, rising to 700 TPD by 2016. 2. Ore grade and recovery have been set at 10.0 grams/ton and 92%, respectively. 3. We assumed gold prices of $1,700 per oz. in the first year, falling to $1,100 over time. 4. Cash costs, on the other hand, are expected by management to be around $350 per oz. For purposes of our NPV computation, however, we have used $400 per oz. with an annual escalation of 5%. 5. We have assumed a total capital cost of $50 million and annual sustaining capex of $5.0 million. 6. Discount rate is set at 10% which is relatively conservative considering where treasuries are trading at the moment. 7. The financing for Longos will likely involve elements similar to what Atlas recently got. We have therefore assumed fully diluted shares of 330 billion or a 16% dilution for current shareholders (after the Alakor private placement). Given all of the above, we have arrived at an NPV (for Longos) of 4.5 centavos per share. Despite the recent run-up in the share price, this still represents substantial upside of 67%. The event that could trigger the run up to such level will be the closing of the $50 million financing which should erase much of the doubt over the viability of the project. As mentioned earlier, we expect this to happen in six months or by the end of 1Q 2012. Upside. Our declining gold price assumption may be too conservative considering that the consensus is for the yellow metal reach and eventually surpass $2,000 per oz. over the next 12 months. Also, our analysis does not take into consideration the potential for UPM to discover more veins within in its tenement, nor have we imputed the potential for the company to acquire other gold mines within the vicinity of Longos. In our view, both are likely considering that Paracale has long been known as a gold producing area and because none of the existing adjacent tenement owners have their own access to financing. 1-Year Gold Price ($ per oz.)
2000 1900 1800 1700 1600

1500 1400 1300 1200

Sep-10
Source: Bloomberg

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Abacus Securities Corporation

United Paragon Mining

September 19, 2011

Risks. In our view, the biggest risk for UPM is that management will not be able to execute according to their set time table. Investors are all too familiar with Carmen Coppers slow progress from 2008 to 2010. This risk, however, is mitigated by three major differences between Carmen and Longos. First, the latter is 100% owned by UPM. Hence, decision making will be faster unlike in the former where Atlas and CASOP would often be at odds on what to do. Second, gold ore from epithermal veins is much simpler to process than ore from a copper-porphyry. The commissioning and ramp-up of Longos, therefore, should be faster and smoother than what Carmen experienced. Third, Carmen was delayed by up to a full year because of the financial crisis of 2008-09 which caused financing to dry up. Longos, on the other hand, should find it relatively easy to raise $50 million, an amount that a single large institution could muster on its own. Additional risks include the potential for gold to decline and potential delays in permitting (Longos Environmental Compliance Certificate has to be amended from 500 TPD to 1,000 TPD). We rate the probability of gold declining substantially as moderate and we have imputed this into our model by using a declining price for the metal. Permitting delays, on the other hand, are common but since Longos only needs an amendment to its ECC, we dont think that this will be a major factor.

Abacus Securities Corporation

United Paragon Mining

September 19, 2011

SHAREHOLDING DECLARATION The analyst(s) who worked on this report may or may not own shares in the above-mentioned security(ies). In addition, Abacus and its parent or affiliates may or may not have broking, investment banking or other financial relations with the company(ies) that is the subject of this report. DISCLAIMER This report is for information purposes only and is meant for general circulation. This report may not be published, circulated, reproduced or distributed in whole or in part to any other person without our express written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the security(ies) mentioned herein. While Abacus has taken reasonable care to ensure that the information contained in this report is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and therefore should not be acted upon without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation into the investment objectives, financial situation or particular needs of the recipient or any class of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of acting on such information, opinion or estimate. KEY TO RECOMMENDATIONS Abacus Researchs technical comments are short term in nature and are trading oriented. Our fundamental views, on the other hand, are medium term calls, usually with a 12-month investment horizon. Buy: More than 10% upside from the share price as of the report date. Hold: from 5% downside to 10% upside from the share price as of the report date. Sell: Greater than 5% downside from the share price as of the report date.

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