Hambledon Mining 2007 Initiating Coverage - 28 June 2007

Sector/ Location:

Mining/ Eurasia

Date:

June 28, 2007

Ticker/ Exchange:

HMB/ AIM

Rec./ Target price:

BUY/ £0.26

Hambledon Mining Initiating coverage

Share Price Performance

Events

GB p

y

Hambledon Mining is an emerging gold producer, soon to have two producing operations in Kazahkstan.

y

Whilst the company does have some political risk due to the location of its operations, the fact that open pit mining at Sekisovskoye commenced some 9 months ago and commissioning is expected to start soon, using straight forward technology suggests that the operating risks will be minimal.

20.00

18.00

16.00

14.00

12.00

Impact 10.00 Jun-06

Oct-06

Feb-07

Jun-07

y

We believe that our target price, which is the net present value, is very conservative.

y

There is excellent potential to both extend the mine life at Sekisovskoye and expand the zinc residue processing operations.

HM B LN Equity

Valuation/Recommendation Analysts: Peter Rose +44 (0)20 7936 5246 [email protected] Brock Salier +44 (0)20 7936 5242 [email protected] Research Assistant: Anna Michniewicz +44 (0)20 7936 5245 [email protected]

y

We are initiating coverage of Hambledon Mining with a BUY recommendation. Our target price is £0.26/share.

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Contents Executive Summary

2

Market Data Summary

3

Sekisovskoye project

4

Geology

5

- Regional Development Reserves

6

Mining and Milling

7

TOO Ognyovka

9

- Location - Resource - Milling - Production Forecasts - Financials Directors and Senior Management

12

- Directors - Management Valuation and Risks

13

- Valuation Technique - Valuation - Risks Financial Forecasts

14

- Commodity price forecasts Research Disclosures

15

Hambledon Mining – Initiating coverage

1

Executive Summary Hambledon Mining Plc (Hambledon) is an AIM listed gold company working in the mineral rich Altai region of East Kazakhstan. Hambledon owns 100% of TOO Sekisovskoye and in early 2007 acquired 100% of TOO Ognevka. At Sekisovskoye, mining operations commenced in June 2006. Until the start up of the processing plant, mining is focused on pre-stripping so that waste material can be used for the construction of the tailings dam and other facilities while ore is being stockpiled. TOO Altai Kenbai-itu (AKB), also 100% owned by Hambledon, is constructing an 850,000 tpy treatment plant at the Sekisovskoye site, which is expected to start up in the second half of 2007. This plant will be capable of treating both open pit ore and underground ore when this becomes available. AKB was established as a separate entity to the mine so that it could also be used for toll milling opportunities whilst providing some longer term tax benefits. Initial production from open pit will be around 40,000 ounces per year, rising to over 100,000 ounces as underground ore is substituted. Further expansions are likely as exploration of extensions to Sekisovskoye bring the inferred resources into the indicated category, and following exploration of the newly acquired tenements. TOO Ognevka is a processing facility configured to treat up to 350,000tpa of zinc smelter residues containing gold, copper and silver. In this initiation report we have reviewed the company in depth. Hambledon is about to make the transition from being an explorer to being a producing company, with both the Sekisovskoye and Ognevka operations expected to start up around the end of 4Q07. Our recommendation is Buy with initial target price of £0.26/share. This is based on the net present value of the company utilising the Fox-Davies Capital currency and commodity price forecasts and a conservative production scenario. This represents only a modest premium to the current share price of £0.175/share. Our reasons for this are: •

• •

The company is about to make the jump to being a producing company. The Sekisovskoye open pit is producing ore and the processing plant is nearing completion, brining with it some commissioning risks. The Ognevka plant is in the process of being refurbished. This also brings commissioning risks. There is potential to expand production at both operations. At Sekisovskoye, this will be achieved by the start up of the underground mine, which has higher grades and at Ognevka where the potential to produce feldspar is under investigation.

However, Hambledon is actively working to extend the underground ore reserves at Sekisovskoye, and investigating producing feldspar from an expanded plant at Ognevka. Should either of these expansion outcomes eventuate, there is substantial upside to our target price.

2

Hambledon Mining – Initiating coverage

Market Data Summary

HAMBLEDON MINING HMB LN

Market: AIM Share price: 17.5p

Key Market Information

Fundraising

Shares outstanding (mn) Market capitalization (£ mn) 52-week high/low

Share Price

423.3

IPO Jun ’04 @ 5.0p

£2.5mn

74.0

Apr ‘05 @ 8.0p

£5.0mn

19.25/12.00

Net cash (£ mn)

4.3

Options and warrants (mn)

Analyst: Peter Rose / Brock Salier BUY June 28, 2007 Target price: 26.0p

Mar ’06 @ 0.1p

£10.4mn

Jan ’07 @ US$0.15

US$16mn

GB p 20.00

18.00

-

Enterprise value (£ mn)

69.7

16.00

Company Information

Major Shareholders

Daws House, 33-35 Daws Lane

Board

45 %

London, NW7 4SD

Gartmore

14%

14.00

12.00

+44 870 111 8778 www.hambledon-mining.com Reserve

Mt

Au g/t

Au oz

Ag g/t

Ag oz

Open pit probable

4.19

1.6

213,352

2.6

346,665

Underground probable

0.83

5.1

13,384

7.4

Total

Jun-06

Au g/t

Au oz

Ag g/t

Ag oz

Indicated

15,16

2.0

991,561

3.1

Inferred

14,18

3.4

1,566,255

Total

29.34

2.7

2,557,816

Source: Bloomberg

2006

2007E

2008E

1,514,685

Net revenues

0.31

10.57

35.73

50.50

4.5

2,061,120

Operating expenses

(0.77)

(4.89)

(13.20)

(15.29)

3.8

3,575,805

Deprec. & amortization

0.00

0.37

1.53

2.81

(0.22)

(0.73)

(3.06)

(5.62)

Pre-tax profit / (loss)

(0.68)

5.32

21.00

32.40

0.00

(1.51)

(6.30)

(9.72)

(0.68)

3.81

14.70

22.68

Balance Sheet (£ ‘000)

2006

2007E

2008E

2009E

Cash

4.35

13.24

30.02

55.92

Other current assets

0.37

2.30

3.70

5.10

10.42

15.05

14.58

12.76

2008E

2009E

2010E

16.0

48.7

88.80

95.4

Income tax

Copper Kt

0.86

3.67

3.67

3.67

Net profit/ (loss)

Silver Koz

27.40

71.60

122.20

120.3

Accountant with experience in Moscow, was CEO of the Central Asian-Enterprise Fund, a US Government sponsored development fund.

PP&E Intangible assets

Managing Director

Accountant with 14 years experience with Rio Tinto Plc. Spent 13 years in companies operating in the FSU; formed Hambledon Mining Company.

0.20

0.00

0.00

0.00

Other non-current assets

10.57

15.05

14.58

12.76

Total assets

15.29

30.59

48.30

73.78

1.29

11.14

14.16

16.96

17.06

17.06

17.06

17.06

Reserves

(0.15)

(0.15)

(0.15)

(0.15)

Retained profit/ loss

(2.91)

2.53

17.23

39.91

Liabilities and Equity

15.29

30.59

48.30

73.78

2006

2007E

2008E

2009E

0.00

10.35

35.29

49.68

(1.31)

(4.89)

(13.20)

(15.29)

Liabilities Share capital

Randall Pyper

Technical Director

Chemical engineer and the general manager of the Australian office of Kappes, Cassiday & Associates. Worked for Celtic Resources Plc’s Suzdal and Zherek mining operations.

Cash Flow (£ ‘000) Baurzhan Yerkeyev

Non-exec. Directors

Chris Thomas EPS sensitivity (per 10% change) Gold £/US$

Kazakh national, originally Chief Geologist, now in charge of Sekisovskoye operations.

2008E 10.8%

2009E 11.63%

2010E 11.4%

-9.3%

-9.2%

-9.4% CY08F

CY09F

Receipts from customers Operating payments Net interests

With the Company since its formation in 1997.

0.26

0.22

0.44

0.82

0.01 (1.04) (8.49)

0.00 5.68 (5.00)

(4.69) 17.84 (1.06)

(8.32) 26.90 (0.99)

Available for sale invest.

-

-

-

-

Proceeds from disposal

-

-

-

-

Investments/ aquisitions

(0.10)

-

-

-

Net investing cash flow

(8.59)

(5.00)

(1.06)

(0.99)

Other adjustments Net operating cash flow PP&E purchase

CY10F

Issue of Share capital Price Assumptions Gold (US$/oz) Copper (US$/t) Exchange rate US$/£

2007E

2008E

2009E

2010E

LT

670

725

620

550

476

6,735 1.96

6,712 1.89

6,029 1.81

5,406 1.77

2,557 1.58

2009E

Other adjustments 2007E

Nicholas Bridgen

Jun-07

Profit & Loss (£ ‘000)

Gold Koz

Chairman

Feb-07

366,280

Mt

Management George Eccles

Oct-06

HM B LN Equity

19,615

226,736

Resource

Production

10.00

9.97

8.20

0.00

0.00

Share issue costs

-

-

-

-

Proceeds from borrowing

-

-

-

-

Net financing cash flow

(9.97)

(8.20)

0.00

0.00

Net change in cash flow

0.34

8.88

16.79

25.90

Hambledon Mining – Initiating coverage

3

Sekisovskoye project

Location and History The Sekisovskoye deposit is 40 km north of Ust Kamenogorsk, at Sekisovka village, just before the road splits with one road to Ridder (formerly Leninogorsk) and on to Russia, the other to Shemonaikha. That road is an A class road, sealed and kept clear of snow in winter. The nearest railway is at Ust Kamenogorsk. Power, water supplies and telephone are all available locally. The deposit was discovered in 1833 by Ivan Zubarev, a mining engineer. Mining occurred on an intermittent basis until 1946. Between 1978 and 1982 “AltaiZoloto” of the Ministry of Non-Ferrous Industry, KazSSR, mined the oxidised area of ore body 2. The open pit was excavated to a depth of 35m and a total of 3,406kg of gold and 3,431kg of silver were mined. Exploration recommenced in 2003 when the geology department of Too Sekisovskoye drilled 75 surface holes and 55 underground holes. All the samples were fire assayed for gold and atomic absorption was used for the silver assays. Exhibit 1: Sekisovka and Ognevka location map.

Sekisovka

Ognevka

Source: Hambledon Mining

4

Hambledon Mining – Initiating coverage

Geology

2

The Sekeisovskoye deposit occurs in the northwest marginal zone of the 40,000km Rudny Altai metallogenic belt that occupies the eastern border of Kazakhstan and the Altaisky region of Russia. Ore is hosted by large breccia pipes in Devonian diorites. Gold forms in tabular shear zones, where an intense hydrothermal alteration has formed structurally controlled bodies. The true thickness of these tabular like zones varies, but has a maximum delineated thickness of 45m. Most of these zones are parallel to sub-parallel within the hosting breccia pipe, and dip around 65 to 80 degrees. The breccia pipes themselves are open at depth. The majority of mineralisation delineated by the company is shallower than 500m, although Soviet drilling indicated that mineralisation continues to at least 950m depth. As would be expected, infill drilling within the upper horizons of the deposit has provided a higher degree of confidence in the delineation of the gold zones. Exhibit 2: Cross section and 3D model of the pipe-shaped ore bodies hosted within large sub-vertical breccia pipes.

Source: Hambledon Mining

Regional Development Regionally, a Russian resource has been defined at the Tserkovka project. The company has subsequently tested other targets around this resource with limited success. Exploration is continuing as there is a possibility that the minor gold intersections found to date could be the upper expressions of a large auriferous breccia pipe at depth. Other breccia bodies are common within the mining camp, and several of the “barren” igneous dykes within the hosting breccias contain noteworthy gold levels. Hambledon has also applied for nearby licences at Glynka and Kruglyachka leases. These are to the north and west of the existing Tserkovka licence boundary. The Kruglyachka lease is prospective for gold, but the Glynka lease is more prospective for pollymetallic ore bodies.

Hambledon Mining – Initiating coverage

5

Reserves The latest JORC based ore reserve was released in September 2006, with a JORC compliant resource of 2.6mn ounces of gold (Table 1). Noteably, the closer spaced grade control drilling has shown that the gold grades are some 18% higher than the geological model predicted. One of the reasons for this is that the original Russian drilling used small core diamond drills and core recovery was low at around 70%. It is our belief that core recovery would be at its lowest around the highly mineralised sections, where the rock is softest, hence the underestimation of the grade. Historically, this has been a common phenomenon in Kazakhstan. Table 1: Resource and reserve estimates. Location

Category

Tonnes (mn)

Au g/t

Contained Metal Au oz

Ag g/t

Contained Metal Ag oz

Au g/t cut-off

Reserves Open pit area

Probable

4.19

1.6

213,352

2.6

346,665

0.5

Underground

Probable

0.083

5.1

13,384

7.4

19,615

0.2

Total

226,736

366,280

Resources Open pit area

Underground

Marginal underground (a)

Totals

Indicated

9.55

1.8

552,671

3.0

921,119

Inferred (b)

6.06

1.8

350,700

2.0

389,667

Indicated

2.21

5.1

362,371

6.2

440,529

Inferred (b)

7.16

5.2

1,197,036

7.1

1,634,415

Indicated

3.40

0.7

76,519

1.4

153,037

Inferred

0.96

0.6

18,519

1.2

37,038

Indicated

15.16

2.0

991,561

3.1

1,514,685

Inferred

14.18

3.4

1,566,255

4.5

2,061,120

Total Indicated and inferred

29.34

2.7

2,557,816

3.8

3,575,805

0.5

2.0

0.5

Source: Hambledon Mining (a) Underground low grade material associated with high grade gold zones (b) Includes resources that have been defined beyond the current limits of the grade model Note: ‘inferred’ resources cannot be used for ore reserves until they have been upgraded

The ore reserve calculations are based on the diamond drilling results, and have not been adjusted for the fact that current indications are that the grade is around 18% higher in practice than in the ore reserves.

6

Hambledon Mining – Initiating coverage

Mining and Milling Mining The open pit mining operations commenced in June 2006, with the initial aim of using the prestripping waste material in the construction of the tailings dam and other facilities. The mining fleet consists of two Hitachi Zaxis 850H hydraulic excavators and six 45 tone Balaz haul trucks, with all mining activities being conducted and supervised by company personnel. Mining utilises standard drill and blast techniques. Ore grade material is mined and hauled to a storage area adjacent to the mill crushing plant. Lower grade material is stockpiled for later treatment with waste material used for tailings dam construction or otherwise placed in dumps. As of mid May 2007, the mining operations had exceeded all targets with the exception of one month and had moved over 1 million cubic metres of material. Mining now includes the creation of a stockpile of ore in readiness for the mill commissioning. It is planned that, subject to financing, preparations for underground mining will start shortly after the start-up of the processing facility in the second half of 2007. Underground mine planning has been completed in respect of the nearsurface western ore bodies and planning for the remaining ore zones is ongoing. The bottom of the open pit has been set at minus 100m. Although this does not take all the available ore into account, 20m below this level is an existing underground level, which Hambledon wants to use for underground exploration and for the future underground mine. Access to the underground western orebodies will be developed via a spiral ramp commenced from surface to the south of the open pit operations, with mining being carried out using long-hole open stoping in the larger ore bodies and overhand cut and fill mining being used in the narrower ore bodies. It is anticipated that underground mining will start at a low level and build up to a rate of around 600,000 tonnes per year. It is envisaged that the build up to this tonnage will take two years to achieve, and we have modelled it as occurring in the December quarter of 2009. At that stage it is likely (but not included in the modelling) that the processing facility will be expanded to enable open pit production to continue in parallel. The start-up of underground mining will greatly increase the gold production rate and significantly lower the cash cost of production. Currently, the underground ore reserves are quite small as Hambledon has been concentrating on the open pit where mining will commence. There are 9.37mt grading 5.1g/t in the resource category, and we believe that at least 1mt will get reclassified into the reserve category in due course. To achieve this, Hambledon plans to get an external appraisal of its plans. Milling The mill is owned by a separate 100% owned subsidiary. In mid 2006, a new local company, TOO Altai Ken-Bayitu, was formed to conduct the processing activities at the Sekisovskoye mine site. This provides some longer term tax benefits for Hambledon. It facilitates the opportunities for toll milling, but more importantly, it helps Hambledon avoid excess profits tax. If the mining industry makes excess profits from mining, then company tax increases from 30% to 60% in a step basis. By separating the mining and milling processes, overall levels of taxation can be minimised. The mill is a conventional CIL circuit. Test work performed both in Australia and Kazakhstan indicated that average recoveries of 92% could be expected. The circuit consists of a three stage crushing plant, followed by primary and secondary grinding. A three stage crushing plant was preferred to using a SAG mill due to the hardness of the ore. This is followed by a gravity circuit, with the gravity concentrate being subjected to fine grinding and the fine concentrate being fed to a separate intensive cyanidation circuit. The gravity circuit tailings are sent to a standard CIL circuit.

Hambledon Mining – Initiating coverage

7

The planned mill throughput rate is 850,000tpa, which on the lower grade open pit is expected to yield 40,000oz-50,000oz of gold per year. Commissioning of the crushing plant has commenced, with the balance of the plant nearing completion. Once the higher grade underground ore is fed to the mill, gold production is anticipated to increase to 100,000oz pa. Construction of the mill facilities is ongoing, although delays have been experienced due to the late delivery of the main ball mills and poor performance from the local construction contractors. The first ball mill recently arrived on site and is being installed. The second ball mill is complete, and expected on site by the end of June 2007. Hambledon recently recruited some suitable qualified staff and acquired the licences necessary to do the work itself. This has led to an increase in productivity. Significantly, apart from improving the quality and timeliness of the work, it also reduces costs. The plant has been designed for ease of expansion of up to 1.2mt pa. A concrete pad has been poured where an additional leach tank will be installed and a SAG mill would be the most likely way of expanding the grinding circuit. This expansion has not been modelled. Forecast production We have modelled a production schedule, based on a mill start up in 3Q07, with the mill reaching full production in 4Q07. Overall gold production is more influenced by the underground ore production which is much higher grade, 5g/t versus the 1.6g/t for the open pit. We estimate that the underground will reach full production in 4Q09. We have included underground ore reserves of 830,000 tonnes in our model, with the result that the underground mine life is relatively short. There is excellent potential to increase the underground ore reserves but we have not included it in our forecasts.

Table 2: Hambledon Mining production schedule.

Gold Cash costs

2007E

2008E

2009E

2010E

Koz

15.0

41.9

81.9

88.5

US$/oz

360.0

338.0

230.0

223.0

Source: Hambledon Mining, FDC

8

Hambledon Mining – Initiating coverage

TOO Ognyovka

Location Ognevka is at Ognevka village, about 50km East of Ust Kamenogorsk, on the southern shore of the Irtish, downstream of the Bukhtarmat hydro-electric reservoir/river system. We believe the road to be sealed for at least most of its distance. It is on the railway line between Ust Kamenogorsk and Ziryanovsk and has its own sidings (Exhibit 1).

Resource The Ognevka plant is a clinker treatment plant, processing clinker generated by the zinc smelting industry in Kazakhstan, and as such has no ore reserves or resources. These slags typically assay between 1.5% to 2.2% copper, 1g/t to 4g/t gold and around 150g/t silver, and have the ability to produce an iron ore and a coke concentrate. Contracts for the supply of these slags are in place. For the feldspar plant, if it is commissioned, there are substantial quantities of existing tailings which contain commercial quantities of not only feldspar, but lithium, beryllium, tantallum and other byproducts.

Milling The Ognevka plant is currently configured to treat up to 350,000tpa of residues or slags from zinc smelters. These residues contain copper, gold, silver, iron and coke. The plant has been closed for the past two years and is currently undergoing a process of rehabilitation. Originally, there had been plans to double the size of the plant and add an extension to the mill building. Construction of the ore handling systems and mill-feed storage bins were completed before the plant was mothballed. The previous owner’s debt was purchased for a cash payment of US$1.7mn, which gave Hambledon the right to buy the company itself for a nominal amount. The repayment of unpaid employee salaries will consume another US$300,000. Of the remaining debt, under the terms of the rehabilitation plan submitted, which has since been approved, the remainder of the debts will be paid out of cash flow over the first three years of earnings. This will amount to a further US$1.1mn. It is estimated that the recommissioning and working capital, plus a further US$1mn of incentive payments to come out of profits, will total US$2.1mn. Finally, there is a contingency and prepurchase of clinker reserves which total another US$1.5mn. The first stage of the rehabilitation focuses on those parts of the plant that will be used for the reprocessing of the zinc residues, of which there are 150,000t on site. As soon as the restart has been successfully commissioned, a study into the completion of the expansion will commence.

Hambledon Mining – Initiating coverage

9

Exhibit 1: Crushed clinker on the rod mill feed belt.

Source: Hambledon Mining

The plant was originally built to treat the output of an associated mine. Hambledon does not own the rights to this mine, but it does have the surface rights of the land surrounding the mine and owns the underground development. The original complex was built to produce feldspar and by-product tin, tantalum, lithium and niobium. Whilst the possibility of acquiring the rights to the mine is a medium term objective, there are substantial quantities of tailings that can be treated. This line of the plant consists of a 200,000tpa gravity separation circuit. This deposit contains 8mt of B, C1 and C2 reserves plus 15mt of P resources.

Production Forecasts Our models are based on processing 350,000tpa of zinc plant residues, commencing towards the end of 2007. We have chosen the mid points in the typical assays with relatively conservative recoveries. Table 3: TOO Ognyovka production schedule. 2007E Gold Copper Silver

2008E

2009E

2010E

Koz

1.60

6.80

6.80

6.80

Kt

0.86

3.67

3.67

3.67

Koz

3.88

16.50

16.50

16.50

Iron

Kt

14.40

61.20

61.20

61.20

Coke

Kt

8.00

34.00

34.00

34.00

Source: Hambledon Mining, FDC

10 Hambledon Mining – Initiating coverage

We have not assumed a doubling in size of the zinc slag processing plant or the start up of the feldspar plant. Assuming the plant operates as expected, with operating costs of only US$15/t, slag acquisition costs of US$5/t and transport and overhead costs between US$10/t and US$25/t, then this promises to be a very profitable venture and we would expect the plant throughput to be increased. There is also further upside. The zinc slags contain about 1% zinc. Once the iron, coke and copper have been removed, the zinc grade would be expected to be considerably higher, giving an opportunity to extract the zinc.

Financials On 29 January 2007, Hambledon announced a successful US$16mn financing. The money was raised by placing to new and existing shareholders 57,022,000 new ordinary shares at an issue price of £0.15 each. Originally the capital raised was to purchase the Ognyovka processing facility, to acquire a second Kazakh company with gold deposits, finance the associated planned developments at Sekisovskoye and provide working capital. Our modelling indicates that barring any unforeseen problems, Hambledon has sufficient cash to bring both operations into production without making further demands on its shareholders. Our modelling has been very conservative at both operations. At the Sekisovskoye gold mine we have only used the proven and probable ore reserves and we expect the underground ore reserve component to be increased significantly over the next few years. Whilst this would not impact upon the profit and loss statement in the short term, it has the potential to be significantly net present value enhancing.

Hambledon Mining – Initiating coverage 11

Directors and Senior Management

Directors George Eccles - Chairman of the Board • Is an accountant with experience in Moscow • Was chief operating officer of the Central Asian-Enterprise Fund, a US Government sponsored development fund. Nicholas Bridgen - Managing Director • An accountant with 14 years experience with Rio Tinto Plc • Spent 14 years in companies operating in the FSU • Formed Hambledon Mining Company, the forerunner of Hambledon Mining plc in 1997. Randall Pyper - Technical Director • A chemical engineer who is the general manager of the Australian office of Kappes, Cassiday & Associates • Previously worked for Celtic Resources Plc’s Suzdal and Zherek mining operations. Baurzhan Yerkeyev – Non-Executive Director • An experienced Kazakhstan geologist • In charge in TOO Sekisovskoye operations. Chris Thomas - Non-Executive Director • Has been a non-executive director since Hambledon Mining was formed in 1997 • Had a successful career in the advertising industry and is currently Chairman and CEO of BBDO and Proximity in Asia.

Management Myrzaly Tiyayev - General Director, TOO Sekisovskoye • An engineer who worked for 22 years at the Pre-Caspian mining and metallurgical Kombat • Former deputy director of Almaty Energy. Neil Stevenson - Operations Manager • A mining engineer with both open pit and underground experience. William Morgan - CFO and Company Secretary • A chartered accountant with 30 years financial management experience • Worked in the UK, Russia the Far East and in Kazakhstan between 1994 and 1997.

12 Hambledon Mining – Initiating coverage

Valuation and Risks

Valuation Technique The valuation technique used to derive the valuation and hence target price of Hambledon Mining is that of deriving the net present value, 12 months forward. The Sekisovskoye gold mine and the Ognyovka processing facility are modeled for the entire life of mine, quarterly, based on current ore resources, and a valuation calculated for the mine using a discount rate of 10.0%. The operations are modeled in US$ and converted into UK£ using the forward exchange curve. Similarly, a negative net present value is then calculated for the head office costs. To this is added the net cash position as at December 31, 2007. The sum of these valuations is then divided by the number of shares on issue to derive the net present value per share.

Valuation In our valuation we have been extremely conservative. We have not allowed any upside to the underground ore reserves at Sekisovskoye or included the potential plant expansion at Ognyovka and Sekisovskoye. Current exploration drilling at Sekisovskoye is targeting the western margins of the proposed pit where extensions of orebody 11 are being defined for both open pit and future underground mining. The company is awaiting the assay results. Fox-Davies Capital is confident that when the ore reserves are upgraded, then the mine life will be extended. It is particularly important that the underground reserves are upgraded as the grade is higher, and hence production costs are significantly lower. Similarly, at Ognyovka, we have not allowed for a plant expansion to process higher tonnages of zinc slags, which will be considered once the existing plant has been recommissioned. Neither have we allowed for an expansion of the plant to produce feldspar, tantalum etc. On this basis, our net present value of £0.26 may be considered very conservative.

Risks There are numerous risks which must be considered before making any potential investment in Hambledon. In the short term, the processing plant at Sekisovskoye must be completed and commissioned. Some of the main items of plant were delivered up to 9 months late, but all major items are now on site or in transit and the company still believes that production will commence in 3Q07. Further, the Ognyovka plant has to be commissioned. It will be processing residues and the recovery factors we have used in the model may not be very accurate. Lastly, there are the risks relating to the commodity and currency assumptions used in the model. Of these, the gold and copper price assumptions are the most important together with the US$ to sterling exchange rate.

Hambledon Mining – Initiating coverage 13

Financial Forecasts Table 4: Historic and forecast financials for Hambledon Mining. Key inputs

2006

2007E

2008E

2009E

Gold (US$/oz)

-

670

725

620

2010E 550

Copper Price (US$/t)

-

7110

5296

6493

5760

Exchange rate

-

1.96

1.89

1.81

1.77

Profit & Loss (£ mn) Net revenues

0.31

10.57

35.73

50.50

51.22

Operating expenses

(0.77)

(4.89)

(13.20)

(15.29)

(14.93) (4.51)

Other adjustments

(0.22)

(0.73)

(3.06)

(5.62)

Deprec. & amortization

0.00

0.37

1.53

2.81

3.06

Pre-tax profit / (loss)

(0.68)

5.32

21.00

32.40

33.23

Income tax

0.00

(1.51)

(6.30)

(9.72)

(9.97)

Net gain / (loss)

(0.68)

3.81

14.70

22.68

23.26

79.94

Balance Sheet (£ mn) Cash

4.35

13.24

30.02

55.92

Other current assets

0.37

2.30

3.70

5.10

0.00

PP&E

10.42

15.05

14.58

12.76

10.38 0.00

Intangible assets

0.20

0.00

0.00

0.00

Other non-current assets

10.57

15.05

14.58

12.76

0.00

Total assets

15.29

30.59

48.30

73.78

90.32

Liabilities

1.29

11.14

14.16

16.96

27.15

Share capital

17.06

17.06

17.06

17.06

0.00

Reserves

(0.15)

(0.15)

(0.15)

(0.15)

0.00

Retained profit /(loss)

(2.91)

2.53

17.23

39.91

63.17

Liabilities and Equity

15.29

30.59

48.30

73.78

90.32

Cash Flow (£ mn) Net operating cash flow

(1.04)

5.68

17.84

26.90

24.70

Net investing cash flow

(8.59)

(5.00)

(1.06)

(0.99)

(0.68)

Net financing cash flow

(9.97)

(8.20)

0.00

0.00

0.00

Net change in cash flow

0.34

8.88

16.79

25.90

24.02

Commodity price forecasts Gold The key driver to our gold price forecast is the long term weakening trend of the US dollar. This has in part been due to the interest rate rises in Europe and a strengthening of the Chinese currency. Gold has not behaved normally in 2007. There are some fundamental reasons for this. In the first half of the year we have seen significant de-hedging by both Barrick and Lihir which removed significant quantities of gold from the market. In 2Q07, we have witnessed substantial Central Bank selling, especially from Spain, which is reported to have sold 108t of gold. Central Bank selling is forecast to continue until the closing date of 26 September 2007. At this time we anticipate that reduction in supply, following the end of Central Bank selling, and an increase in demand as the Indian festival season starts, is combined with western ongoing demand for world jewellery. Copper The earnings estimates are based on the forward copper price curve for the next 63 months. After that we gradually reduce the forecast copper price until it reaches our long term price of US$2,560/t (US$1.16/lb) within 12 months. Exchange rates The operations are modelled in US dollars and converted into UK pounds using the Bloomberg consensus forward exchange curve.

14 Hambledon Mining – Initiating coverage

Research Disclosures Peter Rose – Head of Mining Research Peter Rose has 20 years experience in equities as a resources analyst, most recently having spent 11 years with Deutsche Bank in Australia. Prior to this he spent three years with Prudential Bache and five years with James Capel. Peter's industry experience includes 16 years as a metallurgist, three years with De Beers in South Africa and eight years in the uranium industry, five of which were spent at the Ranger Uranium mine. Peter holds a BSc degree in Applied Mineral Science from Leeds University UK and a Bachelor of Commerce from the University of South Africa. Peter is also a member of the Institute of Mining & Metallurgy and a chartered engineer. T +44 (0)20 7936 5246 F +44 (0)20 7936 5201 E [email protected]

Brock Salier – Mining Analyst Brock has over eight years of international commercial and academic work experience as both a geologist and management consultant. Following a period of practical experience in the mining industry, Brock completed a geology PhD with distinction at the University of Western Australia, focused on gold mineralisation systems. His previous experience includes periods with Rio Tinto, Placer Dome and Great Central Mines covering diamond, nickel, uranium and gold projects. Most recently, Brock was a strategy and business consultant in London with Accenture and Credo Group. T +44 (0)20 7936 5242 F +44 (0)20 7936 5201 E [email protected]

Anna Michniewicz – Research Assistant Anna joined Fox-Davies Capital in April 2006. She holds an MSc degree in Economics from The Poznan University of Economics, Poland. T +44 (0)20 7936 5245 F +44 (0)20 7936 5201 E [email protected]

Investment analyst certification All research is issued under the regulatory oversight of Fox-Davies CAPITAL Limited. Each Investment Analyst of Fox-Davies CAPITAL Limited whose name appears as the Author of this Investment Research hereby certifies that the recommendations and opinions expressed in the Investment Research accurately reflect the Investment Analyst’s personal, independent and objective views about any and all of the Designated Investments or Relevant Issuers discussed herein that are within such Investment Analyst’s coverage universe. Fox-Davies CAPITAL Limited provides professional independent research services and all Analysts are free to determine which assignments they accept, and they are free to decline to publish any research notes if their views change.

Hambledon Mining – Initiating coverage 15

Research disclosure as of June 28, 2007 Company: Hambledon Mining Disclosure: 9 Investment Research Disclosure Legend: 1. In the past 12 months, Fox-Davies Capital Limited or its affiliates have had corporate finance mandates

2. 3. 4. 5.

6. 7. 8. 9.

or managed or co-managed a public offering of the Relevant Issuer’s securities or received compensation for Corporate Finance services from the Relevant Issuer. Fox-Davies Capital Limited expects to receive or intends to seek compensation for Corporate Finance services from this company in the next six months. The Investment Analyst or a member of the Investment Analyst’s household has a long position in the shares or derivatives of the Relevant Issuer. The Investment Analyst or a member of the Investment Analyst’s household has a short position in the shares or derivatives of the Relevant Issuer. As of the month end immediately proceeding the date of publication of this report, or the prior month end if publication is within 10 days following a month end, Fox-Davies Capital Limited and / or its affiliates beneficially owed 1% or more of any class of common equity securities of the Relevant Issuer. A senior executive or director of Fox-Davies Capital Limited, or a member of his or her household is an officer, director or advisor, board member of the Relevant Issuer and / or one of his subsidiaries. Fox-Davies Capital Limited makes a market in the securities of the Relevant Issuer. Fox-Davies Capital Limited acts as corporate broker for the Relevant Issuer. Fox-Davies Capital Limited acts as an investment advisor to the Investment Manager of an Investment Fund that may have an interest in the securities of the Relevant Issuer.

The Investment Analyst who is responsible for the preparation of this Investment Research is employed by Fox-Davies Capital Limited, a securities broker-dealer. The Investment Analyst who is responsible for the preparation of this Investment Research has received (or will receive) compensation linked to the general profits of Fox-Davies Capital Limited. Fox-Davies Capital Limited or its affiliates expect to receive or intend to seek compensation for Corporate Finance services from the subject company in the next six months.

Research recommendations Fox-Davies Capital uses a three-tier recommendation system for stocks under coverage: Buy, Hold or Sell. Buy recommendation means that expected total return of at least 15% is expected over 12 months between current and analysts’ target price. Hold recommendation means that expected total return of between 15% and zero is expected over 12 months between current and analysts’ target price. Sell recommendation means that expected total return expected over 12 months between current and analysts’ target price is negative.

16 Hambledon Mining – Initiating coverage

Disclosure chart Exhibit 2: Hambledon Mining share price.

GBp 30

25

20

15

10 Jun-06

Aug-06

Oct-06

Dec-06

HMB LN Equity

Feb-07

Apr-07

Jun-07

Target price Source: Bloomberg, FDC

Hambledon Mining Recommendation Summary Date Recommendation Target Price (£) June 28, 2007 BUY 0.26

Hambledon Mining – Initiating coverage 17

About Fox-Davies CAPITAL Fox-Davies Capital Limited (FDC) has been advising and raising funds for the natural resource sector since February 2001. The firm specialises in assisting international resource companies gain access to the UK, European and North American capital markets and has a substantial background in emerging markets particularly in Africa, Asia, Russia and the CIS, raising over US$100mn in 2006. FDC enjoys a successful track record in advising and undertaking fundraising transactions for its clients from private equity to IPO and secondary offerings and works with over 350 specialised institutional resource and emerging markets funds worldwide. FDC provides professional advice based on effective analysis and research to assist its corporate clients in presenting their proposals to the investment community. Our strength lies in the oil & gas and mining sectors where as a company we have advised clients on AIM and ASX. Our mining company clients include Amur Minerals (AIM), EMED Mining (AIM), Copper Resources Corporation (AIM), Discovery Metals (ASX), Diamonex (ASX), Kryso Resources (AIM), Siberian Diamonds (private), and Tsar Emeralds (private). FDC is authorised and regulated by the Financial Services Authority (FSA) and is a member firm of the London Stock Exchange (LSE).

Fox-Davies Capital Coverage Natural Resources companies covered by Fox-Davies Capital as of June 28, 2007: Company

Ticker

Recommendation

Target Price

Aurelian Oil & Gas

AUL LN

BUY

0.75p

Arrow Energy

AOE AU

BUY

A$3.26

Fortune Oil

FTO LN

BUY

9.10p

Queensland Gas

QGC AU

SELL

A$1.47

Sydney Gas

SGL AU

BUY

A$0.48

African Diamonds

AFD LN

HOLD

£1.39

Allegiance Mining

AGM AU

BUY

A$1.40

Amur Minerals

AMC LN

BUY

£0.49

Asian Mineral Resources

ASN CN

SELL

C$1.14

Braemore Resources

BRR LN

HOLD

£0.061

Diamonex

DON AU

BUY

A$0.41

Hambledon Mining

HMB LN

BUY

£0.26

Mirabela Nickel

MBN AU

BUY

A$8.80

Gem Diamonds

GEMD LN

SELL

£8.74

Oil & Gas

Mining

Hambledon Mining Initiating coverage

Fox-Davies CAPITAL Whitefriars house 6 Carmelite Street London EC4Y 0BS T +44 (0) 20 7936 5200 F +44 (0) 20 7936 5201 www.fdcap.com