QUANTUM GRAPHITE LIMITED — Capital/Financing Update 2015

Jan 1, 2015

ASIA PACIFIC I EUROPE I NORTH AMERICA

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ASX ANNOUNCEMENT

ASX: VXL & VXLO

2 January 2015

Feasibility Study Phase II Expanded Production & Phase III Advanced Manufacturing

• Feasibility
  study
  demonstrates
  an
  IRR
  of
  46%
  based
  on
  current
  Ore
  Reserves.

• Phase
  II
  Expansion
  capex
  A$37M
  staged
  over
  3
  years.

• Phase
  III
  Advanced
  Product
  Handling
  with
  initial
  capex
  of
  A$13M
  to
  meet customer
  demand
  for
  high
  purity
  and
  specialist
  graphite
  products.

• Feasibility
  study
  establishes
  globally
  competitive
  mine
  gate
  opex
  of
  between

• A$400-­‐A$500
  per
  tonne.

• Staged
  25000tpa
  increases
  to
  reach
  64000tpa
  of
  graphite
  output.

• Advanced
  logistics
  management
  and
  product
  handling
  programs.

• Average
  graphite
  sales
  prices
  of
  A$1669
  to
  A$4774
  per
  tonne.

Valence
Industries
has
completed
its
Feasibility
Study
for
the
significant
expansion
of
its
currently operating
Phase
I
graphite
mining,
processing
and
advanced
manufacturing
capacity.

The
Feasibility
Study
reflects
the
continued
focus
by
Valence
Industries
on
a
program
of
advanced manufacturing
shifting
the
emphasis
from
bulk
tonnages
to
value
added
product
lines
and increased
margins.

The
Executive
Summary
of
the
Feasibility
Study
is
appended
with
the
key elements
discussed
below.

**Production

&
Manufacturing
Strategy**

The
Feasibility
Study
defines
an
advanced
manufacturing
program
for
Valence
Industries
with
two aspects:

(1)
base
flake
graphite
concentrate
production
at
the
Uley
Graphite[TM] site;
combined
with

(2)
advanced
product
handling
facilities
near
the
port
of
Adelaide.

Valence
Industries
has
ore
reserves
exceeding
2Mt
to
meet
current
production
and
sales
programs and
is
drilling
its
exploration
targets
on
a
schedule
to
match
the
need
for
additional
future
raw material.

Expansion
of
the
facilities
at
the
Uley
Graphite[TM] site
will
provide
additional
processing
capacity
in 25000tpa
increments
of
graphite
output
to
reach
64000tpa
to
effectively
match
market
demand. This
Phase
II
plant
is
also
designed
to
deliver
significant
advances
in
quality,
output
reliability
and reduced
processing
costs
compared
to
the
existing
Phase
I
plant.

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The
combined
Capex
over
the
program
for
the
Phase
II
plant
expansion
program
and
for establishing
Uley
Pit
2
will
be
$37M
applied
over
3
years.[1]

The
Feasibility
Study
also
brings
forward
some
of
Valence
Industries’
Phase
III
programs
with
Capex of
$13M.

The
need
to
provide
for
efficient
and
agile
supply
of
multiple
flake
graphite
products, with
certainty
of
cost
and
supply
time,
has
determined
that
an
Advanced
Product
Handling
facility be
located
near
the
company’s
export
port
at
Adelaide.
The
location
of
such
a
facility
is
influenced not
only
by
economics,
but
also
Government
requirements
and
its
support
for
value
adding opportunities.

The
Advanced
Product
Handling
facilities
will
include
sophisticated
product
blending
and
packaging operations,
micronisation
plant
and
scaleable
pilot
plant
for
high
purity
graphite
production.
Each of
these
processes
add
value
and
provide
greater
margin
opportunities,
reducing
reliance
on
basic flake
graphite
grades.

The
direct
operating
costs
identified
in
the
Feasibility
Study
reduce
significantly
from
the
current Phase
I
operations
and
are
expected
to
average
in
the
range
of
A$400/t
to
A$500/t
at
the
mine
gate and
in
the
range
of
A$750/t
to
A$950/t
FOB
in
Port
Adelaide.[2]

Based
on
the
diversity
of
market
regions,
industries
and
products
targeted
by
Valence
Industries the
weighted
average
sales
price
for
the
company’s
flake
graphite
products
fall
in
a
range
of A$1669/t
for
general
products
to
an
average
A$4774/t
for
advanced
processed
products
( fob Port Adelaide).[3]

These
capital
costs,
operating
costs
and
sale
prices
in
conjunction
with
the
ore
reserve
and
taking account
of
general
and
administrative,
marketing,
royalty
and
corporate
tax
currently
give
the project
an
estimated
NPV
of
A$65M
and
an
IRR
of
46%.

These
financial
estimates
are
based
only
on
the
current
JORC
2012
Ore
Reserve.
This
is
considered a
conservative
position
as
the
ore
reserve
and
mine
plan
do
not
take
account
of
the
inferred mineral
resources
in
Uley
Pit
2
or
the
indicated
resources
in
the
stockpiles. Current
drilling
also supports
the
view
that
Uley
Pit
2
can
be
extended. NPV
per
additional
reserve
tonne
contributes $32
per
tonne
in
the
financial
modelling.

**Market

Strategy**

The
analysis
of
the
global
graphite
market
in
the
Feasibility
Study
is
based
on
independent
research and
analysis[4] ,
combined
with
assessment
and
research
undertaken
by
Valence
Industries
with
its existing
graphite
customers
and
markets.
This
has
confirmed
that
the
graphite
market
is
facing
a shortfall
in
supply
over
the
next
few
years.

Valence
Industries
is
well
placed
in
relation
to
other
emergent
graphite
producers
as
it
has
the ability
to
provide
material
to
customers
now
from
existing
production
facilities,
meaning
the lengthy
qualification
process
has
already
commenced.
This
qualification
program
and
productive capacity
enables
the
conversion
of
MOUs
to
sales
orders
to
commence
in
advance
of
Phase
II production.

To
reduce
sales
pricing
risk,
the
strategy
focuses
on
added
product
value
through
multiple combinations
of
branding,
packaging,
product
purity
and
size
that
exceed
more
than
100
unique graphite
product
lines.
This
is
consistent
with
Valence
Industries’
focus
on
advanced
manufacturing rather
than
on
tonnes
produced.
This
advanced
manufacturing
program
will
include
certification
to meet
ISO9001
and
ISO14001
standards
in
line
with
customer
requirements.

1 Working capital requirements are not included.

2 Direct operational costs only; excludes corporate taxes, royalties, overhead charges and capital amortisation.

3 Based on a conversion rate of AUD$1.00 = USD$0.80 (i.e. US$1335 to US$3819 (FOB Port Adelaide))

4 Independent analysis by Roskill Information Services and Industrial Minerals

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The
geographic,
market
and
product
diversification
adopted
in
Valence
Industries’
marketing
plan also
reduces
the
dependency
on
any
key
market
or
customer.

The
political,
economic
and
environmental
risks
for
Valence
Industries
in
Australia
are
low
in comparison
to
other
current
and
potential
flake
graphite
sources
allowing
the
company
to
provide a
low
risk
supply
of
high
grade
flake
graphite
to
markets
where
quality
and
supply
certainty
are valued.

**Further

Recommendations**

The
Board
of
Valence
Industries
has
adopted
a
number
of
recommendations
from
the
Feasibility Study
and
has
directed
management
to
review
some
optimisation
alternatives
before
commencing significant
construction
activities.

In
addition,
recent
testing
of
the
Uley
Pit
2
ore
has
identified
how
a
proven
overseas
minerals treatment
technology
could
be
adapted
for
Uley
Graphite[TM] ,
including
for
the
unique
very
high grade
Arterial
Flake[TM] ,
to
further
reduce
the
capital
and
operating
costs,
particularly
for
crushing.

Valence
Industries
expect
that
these
activities
will
be
completed
by
the
end
of
the
March
quarter 2015
and
that
securing
of
financing
and
detailed
project
planning
for
construction
can
continue over
that
quarter.

For
further
information,
please
contact:

Jarek
Kopias CFO
&
Company
Secretary info@valenceindustries.com +61
8
8418
8564

Competent
Persons
Statement Valence
Industries
confirms
that
it
is
not
aware
of
any
new
information
or
data
that
materially
affects
the
information included
in
this
announcement
and
that
all
material
assumptions
and
technical
parameters
underpinning
the
estimates
in this
announcement
continue
to
apply
and
have
not
materially
changed
since
the
announcements
previously
released
as “Valence
Doubles
Existing
ROM
Stockpiles”
(6/8/14),
“Uley
Graphite
Grade
Increases
to
11.7%”
(17/11/14)
and
“Maiden High
Grade
Graphite
Ore
Reserve”
(17/12/2014).

Forward
Looking
Statements

All
statements
other
than
statements
of
historical
fact
included
in
this
announcement
including,
without
limitation, statements
regarding
future
plans
and
objectives
of
Valence
Industries
Limited
(Valence
Industries)
are
forward-­‐looking statements.
When
used
in
this
announcement,
forward-­‐looking
statements
can
be
identified
by
words
such
as
‘may’, ‘could’,
‘believes’,
‘estimates’,
‘targets’,
‘expects’
or
‘intends’
and
other
similar
words
that
involve
risks
and
uncertainties. These
statements
are
based
on
an
assessment
of
present
economic
and
operating
conditions,
and
on
a
number
of assumptions
regarding
future
events
and
actions
that,
as
at
the
date
of
this
announcement,
are
expected
to
take
place. Such
forward-­‐looking
statements
are
not
guarantees
of
future
performance
and
involve
known
and
unknown
risks, uncertainties,
assumptions
and
other
important
factors,
many
of
which
are
beyond
the
control
of
the
company,
its directors
and
management
of
Valence
Industries,
that
could
cause
Valence
Industries’
actual
results
to
differ
materially from
the
results
expressed
or
anticipated
in
these
statements.

Valence
Industries
cannot
and
does
not
give
any
assurance
that
the
results,
performance
or
achievements
expressed
or implied
by
the
forward-­‐looking
statements
contained
in
this
announcement
will
actually
occur
and
investors
are
cautioned not
to
place
undue
reliance
on
these
forward-­‐looking
statements.
Valence
Industries
does
not
undertake
to
update
or revise
forward-­‐looking
statements,
or
to
publish
prospective
financial
information
in
the
future,
regardless
of
whether
new information,
future
events
or
any
other
factors
affect
the
information
contained
in
this
announcement,
except
where required
by
applicable
law.

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ASIA PACIFIC I EUROPE I NORTH AMERICA

Valence Industries Feasibility Study Report

Uley Graphite Phase II Expansion Program & Phase III Advanced Manufacturing

Executive Summary Report 31 December 2014

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Valence Industries Feasibility Study Report

Uley Graphite Phase II Expansion Program & Phase III Advanced Manufacturing

Executive Summary ..................................................................................................... 6 1. Introduction ...................................................................................................... 6 2. Location & Strategic Plan ...................................................................................... 8 3. Manufacturing & Processing .................................................................................. 10 4. Global Markets & Sales ........................................................................................ 12 5. Ore Reserves & Mining ......................................................................................... 13 6. Mineral Resources & Exploration Targets ................................................................... 15 7. Waste Management & Civil Works ........................................................................... 17 8. Logistics & Infrastructure ..................................................................................... 17 9. Project Execution .............................................................................................. 18 10. Capital & Operating Costs ................................................................................... 18 11. Regulatory & Legal ........................................................................................... 19 12. Financial Analysis ............................................................................................. 20 13. Risk Analysis ................................................................................................... 23 14. Recommendations & Opportunities ........................................................................ 23 15. Disclaimer & Forward Looking Statement ................................................................ 24

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Executive Summar y

1. Introduction

1.1 Valence Industries

• Valence Industries Limited (Valence Industries) is an Australian company that listed on the Australian Stock Exchange (ASX) in January 2014 (ASX Code: VXL & VXLO) and is the 100% owner of the Uley Graphite[TM] facilities.

• Valence Industries is an industrial manufacturing company producing high grade flake graphite products for distribution and sale to global markets and multiple industries.

• Valence Industries’ is located in Adelaide, South Australia and its Uley Graphite[TM] operations are located 23 kilometres from Port Lincoln in regional South Australia.

1.2

Feasibility Study Program – Phase II & Phase III

• Valence Industries commenced the Feasibility Study ( FS ) in January 2014 for the purpose of assessing the Phase II expanded operation of its Uley Graphite[TM] mining and manufacturing facilities. This summary contains the conclusions reached in the Feasibility Study process and now also includes early delivery of elements of Valence Industries’ Phase III advanced manufacturing strategies.

• The Feasibility Study report has been drafted by the Valence Industries project team in cooperation with Advanced Focus. The key contributors to and participants in the delivery of the Feasibility Study and their respective areas are as follow:

Area	Participant
Ore Reserve & Mineral Resources	Coffey Mining & Valence Industries
Geology	Coffey Mining & Valence Industries
Mine Plan	Coffey Mining & Valence Industries
Metallurgy	Bluechip Engineering & Valence Industries
Processing & Manufacturing	Bluechip Engineering, Advanced Focus & Valence Industries
Project Logistics	Insync Supply Chain Management (ISCM)
Project Infrastructure	Bluechip Engineering, Insync Supply Chain Management (ISCM), Valence Industries & Clutch Consulting
Project Execution	Advanced Focus, Bluechip Engineering & Badge Construction
Graphite markets	Roskill & Valence Industries
Capital Costs	Bluechip Engineering, Golder Associates, Coffey Mining, Clutch Consulting, Insync Supply Chain Management (ISCM), Badge Construction
Operating Costs	Bluechip Engineering, Golder Associates, Clutch Consulting, Insync Supply Chain Management (ISCM)
Financial Analysis	Fortis Ago, Roskill & Valence Industries

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1.3 Key Outcomes

	Feasibility Study Dec. 2014	Feasibility Study Dec. 2014	Feasibility Study Dec. 2014	Feasibility Study Dec. 2014
Ore Reserves5	Total tonnes	2,035,000 t
	Contained tonnes	261,000 t
	Strip Ratio	5.9:1
	Initial Mine Life	5 Years
	Average Grade (gC)	12.9%
Graphite Production Capacity	Capacity Phase	Added Capacity	Capacity Scheduled	Total Capacity
(tonnes per annum of graphite produced)	Phase I	14,000	2014	14,000
	Phase II & III (Stage 1)	+25,000	2016	39,000
	Phase II & III (Stage 2)	+25,000	2017-2019	64,000
	Phase II & III (Stage 3)	+25,000	Currently unscheduled	89,000
	Phase II & III (Stage 4)	+25,000	Currently unscheduled	114,000
Operating Cash Costs6 (per tonne of flake graphite produced)	Phase I & II (mine gate)	A$400 – A$500
	Phase I, II & III (FOB Adelaide)	A$750 – A$950
Average Sales Price (per tonne of graphite)7	Phase I & II (FOB Adelaide)	A$1,669
	Phase III (FOB Adelaide)	A$4,774
Capital Costs8	Phase II –Plant & Pit (Stage 1 & Stage 2)	A$36.7M (Uley Site)
	Phase II & III (Advanced Product Handling plant)	A$13.2M (Adelaide)

5 There is an additional 1 million tonnes of Indicated and Inferred Resource within the Uley Pit 2 shell and existing stockpiles which is not included in the current Ore Reserves.

6 Operating Cash Costs exclude government royalties, head office costs, capital amortisation and marketing costs.

7 Sales prices are expressed here in Australian Dollars (AUD) but no sales are made in AUD with the majority of sales made in United States Dollars (USD)

8 Working capital requirements are not included.

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2. Location & Strategic Plan

2.1 Project Location

• The Valence Industries base in South Australia is a highly favourable location in terms of project risk compared to other prospective graphite producers and, in many instances, compared to existing producers.

• Australia is regarded as one of the lowest political risk locations in the world; there is financial and banking system stability; a functional legal system; and low sovereign. Australia has also rated for a long period in the highest category least likely to be exposed to corruption.

• The existing Uley Graphite[TM] facilities and Uley Graphite[TM] Phase II plant expansion and Uley Pit 2 are located 23km south west of the regional centre of Port Lincoln in South Australia (Figure 2.1).

Figure 2.1 – Uley Graphite[TM] Project Location

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2.2 Strategic Plan

• Graphite is an industrial mineral. Valence Industries is therefore operating in a market driven sector where specific appreciation of customer requirements and corresponding customer qualifications from established processing facilities are the dominant drivers. Demand for graphite has continued to grow in recent years and there is currently a shortfall in production. This demand vs supply situation clearly shows a current and projected supply short-fall (Figure 2.2.1).

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Figure 2.2.1 - Graphite Supply Demand Deficit

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• Valence Industries has gone beyond simple reliance on this identified shortfall in supply and increase in demand and has developed a strategic plan which capitalises on its key assets, namely established processing facilities, resources of coarse high grade flake graphite and deep understanding of the global graphite markets. Entry to the market and development of the company’s Phase II & Phase III expansion program has been based on a growth plan focused on achieving higher margins through product quality as opposed to simplistic increased delivery of base concentrate tonnes.

• Phase I , refurbishment of the existing plant, has recently been completed with the capacity to produce 14,000 tonnes per annum of graphite. This provides early sales opportunities and the ability to qualify and supply graphite from an operating facility rather than just bench scale pilot programs that do not meet full qualification requirements.

• The expansion of operations by Valence Industries was the subject of a Scoping Study completed in 2013. That Scoping Study proposed new open pit mining in Uley Pit 2 and an increase in production capacity by up to 50,000 tonnes of graphite output per annum.

• The Feasibility Study has taken two important steps beyond the Scoping Study:

• Valence Industries has set out a sophisticated program for advanced manufacturing of flake graphite that incorporates staged expansion of its Phase II base processing operations and has brought forward and incorporated key aspects of what the company previously expressed as its Phase III high purity programs to deliver valueadded manufacturing and correspondingly increase margins; and

• Valence Industries’ current expansion is based on the existing ore reserve of five years and the company is therefore targeting the progressive conversion to reserves of its JORC 2012 Exploration Targets of between 9,000,000t-12,000,000t at grades between 9% and 12% graphitic carbon staged to match corresponding customer demand. Current drilling is focused on the Uley Pit 2 Extension which has the potential to significantly increase the ore reserve and the mine life. Any such increased ore reserve would positively impact the NPV for the Phase II expansion project and will provide Valence Industries with options that may support future increases in plant output beyond the Phase II output targets depending on market demand.

• This growth path for Valence Industries is a significant advance on the program originally envisaged under the Scoping Study. There is now a greater focus on customer specific graphite products, higher margin products and new opportunities arising as a

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result of the advanced in-fill drilling program and the discovery of high grades of graphite including the unique areas of Arterial Flake[TM] .

3. Manufacturing & Processing

3.1 Production Principles

• Evaluation of Uley Graphite[TM] ore indicates that it is quite friable and requires a simple comminution circuit that can handle clay bearing materials and liberate the graphite without excessive breakage of flake sizes and creation of fines.

• Flotation testwork has validated that a concentrate graded 94% carbon can be achieved from a basic multi stage open circuit flotation circuit at typically 85% recovery. Simple dispersants provide a solution to the separation from any unwanted materials associated with the graphite.

• The collector / frother reagents are hydrocarbon based hence the need for care in the design to prevent any contact between groundwater and residual hydrocarbons in the process water and a corresponding need for ongoing monitoring and reporting engagement with relevant regulators.

• Given that water is a critical issue in the region, additional monitoring testwork and studies will be conducted even at the conclusion of other works associated with the Feasibility Study to ensure optimal water management outcomes and meet regulatory requirements.

• Valence Industries’ operational strategy is illustrated in figure 3.1.2 below:

Figure 3.1.2 – Valence Industries Operational Strategy

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3.2 Phase II Plant (Uley Graphite[TM] Facility Expansion)

• The engagement with Valence Industries customers and the evaluation of the market (as outlined above) has seen a considerable change in the production strategy. It is now proposed that the Phase II plant expansion at the Uley Graphite[TM] site will involve:

• the continued operation of the Phase I plant and its integration with the Phase II expanded facilities;

• the construction of the Phase II processing facilities at the site in two stages of 25,000 tonnes per annum each (a total of 50,000 tpa) implemented to match increasing customer demand and stage capital allocation over three years. Land allocation and plant design will allow for potential future expansion in 25,000 tpa increments to a total additional capacity of 100,000 tpa above the current Phase I capacity;

• the development and conduct of mining operations in Uley Pit 2 to feed both the Phase I plant and the Phase II plant as discussed below; and

• the delivery of the base graphite concentrate grades from the Uley Graphite[TM] site to the Phase II & III Advanced Product Handling facility to be located in Adelaide.

3.3 Phase II & Phase III Plant (Advanced Product Handling)

• As part of the program of customer engagement and the assessment of logistics from the Uley Graphite[TM] site (discussed below) the Feasibility Study has determined that achieving product agility by shifting the final product sorting, blending, treatment, packaging and handling as close to the port for export will add significant value to Valence Industries’ focus on advanced manufacturing.

• This means the processing plants at the Uley Graphite[TM] site will provide the company with base graphite concentrate to be transported as close as possible to the Port of Adelaide. That graphite concentrate will then undergo further value adding and advanced manufacturing treatment in Adelaide.

• The value adding and advanced manufacturing processes to be applied in Adelaide involve a combination of the originally planned Phase II program and what Valence Industries previously described as its Phase III specialist blending and high purity program. This is known as the “Advanced Product Handling” facility.

• The Advanced Product Handling facility will provide for multiple products to be created from the base graphite concentrate, the development of refined and specialist graphite blends and packaging to meet specific customer requirements. This will encompass the serving multiple product families with various combinations resulting in several hundred unique permutations.

• Acceleration of advanced treatment options will need non-mining regulatory approvals for those facilities. Such approvals are not considered to be onerous and it is expected that they can be achieved within the projected time frames expressed in this Feasibility Study.

3.4

Phase III Pilot Plant (High Purity & Specialist Products)

• The Feasibility Study also proposes the implementation of a Phase III high purity and specialist products pilot plant. This is in addition to the early introduction of the Phase III specialist blending in the Advanced Product Handling facility.

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• The Phase III High Purity and Specialist Products pilot plant is designed to further verify Valence Industries’ capacity to deliver micronised and high purity graphite for a wide range of specialist applications.

• Those specialist graphite applications have the potential to deliver significant added value to the range of specialist graphite product lines already defined by Valence Industries and are consistent with the company’s advanced manufacturing focus on delivering higher value products and not on shifting tonnes of graphite.

4. Global Markets & Sales

4.1

Market Capability

• The global graphite market has many similar characteristics to other industrial minerals. It requires extensive experience in that market, specific qualification of graphite products and excellent relations with customers to form a real appreciation of the graphite market dynamics.

• Valence Industries’ Managing Director & CEO, Christopher S. Darby, and its Chief Marketing Officer, Christopher Whiteley, have decades of such experience and have been able to provide a confident and accurate analysis of the market and sophisticated input on the key parameters for the development of a strategic plan for the company to exploit its pivotal strength in high quality coarse flake graphite resources set in the context of the current market place. This capability and the conclusions reached have been verified by reference to a range of independent external sources within the Feasibility Study.

• The critical success factor for Valence Industries will be the company’s advanced manufacturing focus on delivering higher value products and not on shifting and selling bulk tonnes of graphite.

• Valence Industries’ established Phase I processing facilities, have placed the company in a unique position to continue to provide material for customer evaluation and qualification processes, and that program is designed to ensure conversion of MoU’s and customer programs to firm sales contracts.

4.2

Graphite Products & Quality

• The Uley Graphite[TM] facilities first produced graphite in the early 1900s and, prior to the recent Phase I recommissioning program, the plant also produced graphite up to 1993.

• The Uley Graphite[TM] products are highly regarded in the global market and current customer demand is significant.

• The target for Valence Industries from the existing Phase I operations and with the Phase II expansion is the delivery of high quality graphite products to meet advanced technical specifications with a specific focus on supplying higher value-added graphite products.

• As part of its overall advanced manufacturing philosophy and its drive for product quality and reliability for commitment for advanced manufacturing customer requirements, the Company is committed to gaining ISO accreditation for its operations..

4.3 Customers & Markets

• Valence Industries has a range of existing customers across a number of regions and in an array of industries. Those customers are located in countries across the Asia Pacific, Europe and North America.

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• Valence Industries has signed MOUs for a combined total 80,000 tonnes of graphite for delivery over the next three years.

• Sales agreements for uncommitted long term production and for higher value sales are being negotiated with a range of customers and are scheduled in line with the relevant qualification process and the capacity of Valence Industries to deliver production.

• Currently anticipated demand under Valence Industries’ sales forecasts is expected to exceed the Phase I plant production capacity by March 2016.

4.4

Graphite Pricing

• Valence Industries has established an average sales prices across its range of flake graphite products and this has been verified in the sales agreements and MOUs entered into by the company to date.

• There is a significant sales price difference between the graphite concentrate which leaves the Uley Graphite[TM] site and the multiple graphite product lines for Phase II and Phase III which will be manufactured at the Advanced Product Handling facility in Adelaide. There is also a sales price difference between those original flake graphite product lines derived from Phase I and Phase II and those product lines derived from the value adding arising from Phase III operations.

• That average sales price difference between the flake graphite products from the Phase I and Phase II general product streams and the flake graphite products from the Phase III production streams that require secondary processing are shown in the table below:

Average Sales Price (per tonne of graphite)9	Phase I & II (FOB Adelaide)	A$1,669
	Phase III (FOB Adelaide)	A$4,774

5. Ore Reserves & Mining

5.1

Mining

• The sales tonnages proposed by Valence Industries are modest in comparison to the wider mining industry. This is driven by customer demand and Valence Industries’ focus on value adding and advanced manufacturing.

• A consequence of the scale is that Valence Industries’ mining requirements are more closely aligned to a medium to large quarry rather than a traditional high capacity mine site. It is therefore possible to engage local quarrying contractors to provide and operate the earthmoving equipment required to feed the processing plants.

• It is expected that campaign mining will be used to achieve some efficiency at these volumes, since normal mining economies of scale are not achievable.

• Drilling and blasting is not required. Valence Industries’ contractors will utilise excavator(s) for loading 40t haul trucks for ore haulage and waste removal duties.

• Valence Industries staff will undertake strict grade control as this can have significant cost impacts.

9 Sales prices are expressed here in Australian Dollars (AUD) but no sales are made in AUD with the majority of sales made in United States Dollars (USD)

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• There is a relatively high waste to ore ratio (5.9:1) but this more reflects the mineralisation style rather than the overburden situation and is likely to be refined in future.

• Initial waste will be used primarily for construction of the tailings storage facilities. Areas are available within a reasonable distance of the plant / pit area to mitigate long haulage distances for waste material.

• The stockpiled ore will be laid out to facilitate blending ahead of its introduction to the processing plant.

5.2 Resources

• Valence holds tenements in a globally recognised graphite bearing region that hosts numerous targets for further drilling. The work undertaken in 2014 across Uley Pit 2 verified that target identification process was not only valid but delivered some intersections of graphite with over 60% graphite content. Some of this high grade graphitic mineralisation outcrops and extends for up to 150m in depth with significant intersections across the ore body.

• Over 90% of the JORC 2012 Measured and Indicated Resources has been converted to and Ore Reserve – another successful outcome for Valence Industries in 2014. Current JORC 2012 Ore Reserves underwrite production for more than 5 years while the next phase of drilling is underway with an objective to significantly increase the existing ore reserve.

Figure 5.2 – Uley Graphite[TM] Ore Reserve Growth Potential

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5.3 Uley Pit 2 Optimisation and Design

• Gemcom Whittle pit optimisation software was used to define economically optimal open cut shapes to guide the detailed pit designs and sequencing assuming a average base graphite price of USD$1,400 per tonne (AUD$1,750 per tonne).

• Pit shells were used to guide the detailed pit design for Uley Pit 2 including berm and bench configurations recommended by geotechnical consultants Coffey Mining.

• The Uley Pit 2 design contemplates a starter pit to 16 metres depth to fit with current regulatory approvals and an Uley Pit 2 cutback to extend the depth following further regulatory approvals.

5.4 Ore Reserves

Classification		Tonnage	Average Grade %C
Proved		319,000	17.9
Probable		1,716,000	11.9
	Total	2,034,000	12.9

6. Mineral Resources & Exploration Targets

6.1 Mineral Resources

Classification	Tonnage	Average Grade %C	Contained Tonnes
Measured	340,000	17.92	60,000
Indicated	1,850,000	11.84	220,000
Indicated (Stockpiles)	174,000	6.23	10,866
Inferred (Uley Pit 2)	850,000	8.89	80,000
Total	3,214,000	11.54	370,866

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6.2 Exploration Targets

	Classification Tonnage Average Grade %C Location
	Exploration Target 9,000,000 to 12,000,000 9 to 12 ML5561 & ML 5562 RL66 & RL 67 Immediate Vicinity of UleyPit 2

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6.3 Other Resources & District Exploration

• Similar style mineralisation and potential for additional resources has been identified near the Uley Graphite[TM] deposit on Valence Industries 75km[2 ] Exploration Licence. Partial drilling of those additional areas by a previous explorer has shown encouraging graphite assays at a number of locations along the strike including Homestead, Kasey, Fisheries and salt lake and were previously reported.

• This information from Coffey Mining referred to above was prepared and first disclosed under the JORC Code 2004. It has not been updated since to comply with the JORC Code 2012 on the basis that the information relating to those areas has not materially changed since it was last reported.

7.

Waste Management & Civil Works

The waste handling proposal developed in conjunction with Golders and Associates and Bluechip Engineering features:

• Thickening of waste slurry streams (tailings) from the Phase I & Phase II plants;

• Final belt filtration of the solids from the thickener;

• Maximum recovery of water at all points to be recycled as process water;

• Placement of filtered solids into the Tails Storage Facility (TSF);

• The majority of mine waste to be used to construct dam structure to store filtered solids in the TSF;

• Process water dam structure lined to avoid residual hydrocarbons used in the flotation process from entering groundwater;

• Mine waste with appropriate material characteristics utilised for roadworks, initial civil works and safety berms; and

• TSF to be progressively rehabilitated.

8.

8.1

Logistics & Infrastructure

Logistics & Adelaide Facilities

• Consultation with existing global customers and detailed analysis of how packaged material would be transported from the Uley Graphite[TM] site and efficiently distributed globally in led Valence Industries to the conclusion that the final product differentiation and packaging plant for Phase II needed to be as close to the port of export as possible.

• The only practical export port is Port Adelaide since the final packaged products must be containerised and there is no container facility at Port Lincoln.

8.2 Infrastructure

• Valence Industries has extensive established infrastructure at its Uley Graphite facilities associated with its current Phase I operations. This includes established land ownership, electricity, water, roads, workshops, laboratories, administration buildings and the substantial local supporting infrastructure at the regional centre of Port Lincoln just 23 kilometres away on a tarmac highway.

• New infrastructure in the feasibility study includes on-site supporting civil infrastructure, haul road upgrades, power upgrades and supplemental water supply.

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9. Project Execution

9.1 Execution Approach

• Both the Phase II plant expansion and the Phase II development of Uley Pit 2 are brownfield expansions of the existing Phase I graphite mining and processing operations.

• The execution of the Phase II project is based on an Engineering, Procurement and Construction Management (EPCM) philosophy managed by Badge Constructions and a Valence Industries project control group and incorporating Early Contractor Involvement (ECI) for key strategic construction, engineering and plant supply.

• Specialist contractors for engineering, electrical, instrumentation, automation, installation and commissioning are engaged by Valence Industries from a short-list of preferred suppliers utilising a competitive request for quote (RFQ) program

9.2 Schedule

Capacity Phase	Added Capacity	Capacity Scheduled	Total Capacity
Phase I	14,000	2014	14,000
Phase II & III (Stage 1)	+25,000	2016	39,000
Phase II & III (Stage 2)	+25,000	2017-2019	64,000

10. Capital & Operating Costs

10.1 Capital Costs

Capital Phase	Cost Area	Capital Cost Amount10
Phase II – Plant & Pit (Stage 1 & Stage 2) (Uley Site) (Inclusive of contingency of ±15%)	Phase II, Stage 1, Plant Expansion	A$18.6M
	Phase II, Stage 2, Plant Expansion	A$8.6M
	Uley Pit 2 & Support Infrastructure	A$8.5M
	Site Infrastructure & Other	A$1.0M
	Total	A$36.7M
Phase II & III Advanced Product Handling (Adelaide) (Inclusive of	Phase II APH Facilities	A$6.3M
	Phase III APH Pilot Plant	A$5.6M
	Site Infrastructure & Other	A$1.3M
contingency of ±15%)	Total	A$13.2M

10 Working capital requirements are not included.

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10.2 Operating Costs

Operating Cash Costs11 (per tonne of flake graphite produced)	Operating Cash Costs11 (per tonne of flake graphite produced)
Phase I & II (mine gate)	A$400 – A$500
Phase I, II & III (FOB Adelaide)	A$750 – A$950

11. Regulatory & Legal

11.1 Ownership

• Valence Industries Limited through its 100% owned subsidiary Valence Industries Operations Pty Ltd owns the real property on which the Uley Graphite[TM] operations are located for the Phase II expansion as well as the established Phase I processing facilities and the associated Mining Leases, Retention Leases and Exploration Licence.

11.2 Environment

• Valence Industries has a strong commitment to meeting best practice in the area of environmental protection within the scope of its operations. Consistent with this approach is the pursuit of ISO14001 accreditation and the substantive commitments which the company has given under the detailed Program for Environment Protection and Rehabilitation approved by the South Australian Government on 23 December 2014 for Phase I and Phase II operations from the Uley Graphite[TM] site.

11.3 Tenements & Permits

• Valence Industries Limited through its 100% owned subsidiary Valence Industries Operations Pty Ltd owns the following tenements. The Mining Leases represent the area the subject of the expansion programs at the Uley Graphite[TM] site under the Feasibility Study:

Number	Type	Status	Grant Date	Expiry Date	Area (Ha)
ML5561	MiningLease	Current	Mar 1999	Mar 2017	44 ha
ML5562	MiningLease	Current	Mar 1999	Mar 2017	22 ha
RL 66	Retention Lease	Current	Oct 1987	Oct 2016	225 ha
RL 67	Retention Lease	Current	Oct 1987	Oct 2016	187.5 ha
EL 4778	Exploration Licence	Current	Oct 2011	Oct 2016	75km2

• Valence Industries Limited through its 100% owned subsidiary Valence Industries Operations Pty Ltd was issued with regulatory approval to conduct its Phase I and the proposed Phase II expansion operations at the Uley Graphite[TM] site in December 2014.

11 Operating Cash Costs exclude government royalties, head office costs and marketing costs.

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• The existing regulatory approval permits mining to a depth of 16 metres. Valence Industries will need to obtain further regulatory approvals to mine below 16 metres on its existing Mining Leases. The company reasonably anticipates that those approvals will be received ahead of any operational requirements to mine below 16 metres.

• Valence Industries will need to obtain further regulatory approvals including additional mining licences in future to extend its mining operations onto those areas currently the subject of its exploration drilling program for the Uley Pit 2 Extension. The company reasonably anticipates that those approvals and leases can be in place ahead of any operational requirements.

• The land on which the Mining Leases, Retention Leases and Exploration Licence are located is freehold land which has been farmed for periods in excess of 150 years.

12. Financial Analysis

12.1 Key financial assumptions

• In order to assess the project economics and viability of the proposed expansion operations in the Feasibility Study, a full life of mine cash flow model was constructed.

• The financial model incorporates the following key operating elements:

• Phase I (existing) plant with 14,000 tpa capacity;

• Phase II new expanded processing facility incorporating capacity to an additional 50,000 tpa concentrate in two stages as follow:

Capacity Phase	Added Capacity	Capacity Scheduled	Total Capacity
Phase II & III (Stage 1)	+25,000	2016	39,000
Phase II & III (Stage 2)	+25,000	2017-2019	64,000

• Phase II & Phase III Advanced Product Handling facilities in Adelaide.

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• Graphite price assume differential weighted averages per tonne for base graphite product lines and for value added graphite product lines as follow:

Product Source /	Average Sales Price
Product Lines	(per tonne of graphite)12
Phase I & II (**FOB Adelaide) **	A$1,669
Phase III (**FOB Adelaide) **	A$4,774

12.2 Model construction

• The model has been constructed principally to model After Tax Free Cash to Equity and as such be representative of cash flows that are likely to be received by VXL shareholders over the life of the expanded operations. The table below summarises the functional elements of the model:

Element	Assumption / Input
Model Start Date	Dec 2014
Modelling period	Monthly
Key Financial Output	Free Cash Flow to Equity
Real/Nominal Basis	Real
Exchange Rate USD/AUD	0.80
Discount rate	10% (after tax)
Tax Modelling	After tax
Graphite Resource Mined	2,035kt (Uley pit 2)

12 Sales prices are expressed here in Australian Dollars (AUD) but no sales are made in AUD with the majority of sales made in United States Dollars (USD)

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12.3 Financial summary

Utilising the above base case assumptions, the economic model in the Feasibility Study produces a series of outcomes some of which are summarised as follows:

Description Outcome	Description Outcome
NPV 10 (after tax) $65m
IRR 46%
Total Ore Mined 2,035 kt
Average Head Grade 12.9%
Life of Mine 5 Years
Total Graphite Concentrate Sold 235kt
Capex13	Phase II –Plant & Pit (Stage 1 & Stage 2) A$36.5M (Uley Site)
	Phase II & III (Advanced Product Handling plant) A$13.2M (Adelaide)
Opex14 (per tonne of flake graphite produced)	Phase I & II (mine gate) A$400 – A$500
	Phase I, II & III (FOB Adelaide) A$750 – A$950

12.4 Sensitivities

• Ore reserves have a substantial impact on the current NPV of the Phase II expansion project. It is anticipated that additional ore reserves will be identified from the current drilling programs for the Uley Pit 2 Extension on a portion of the company's JORC 2012 Exploration Target. Those drilling programs and the conversion to ore reserves are being scheduled to coincide with customer demand for production.

• Some of the key sensitivities modelled for both NPV and IRR are as follow:

NPV Sensitivity Table (A$m)	Valence Industries – NPV at ranges from Feasibility Study Base Case
	-20% -10% Base +10% +20%
Capex	$74M $69M NPV$65M $60M $55M
Opex	$83M $74M NPV$65M $55M $46M
	Valence Industries – IRR at ranges from Feasibility Study Base Case -20% -10% Base +10% +20% 58% 51% IRR 46% 41% 37% 58% 52% IRR 46% 40% 35%
IRR Sensitivity Table (%)	Valence Industries – IRR at ranges from Feasibility Study Base Case
	-20% -10% Base +10% +20%
Capex	58% 51% IRR 46% 41% 37%
Opex	58% 52% IRR 46% 40% 35%

13 Working capital requirements are not included.

14 Operating Cash Costs exclude government royalties, head office costs and marketing costs.

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13. Risk Analysis

13.1 Project Finance

• Valence Industries is well advanced in its discussions with a number of international project financiers shortlisted and expects to mandate lead arrangers in Q1 2015.

• Valence Industries has received offers of mezzanine debt, contract factoring and convertible instruments which it is evaluating.

• Following assessment of the risk analysis on funding sources the balance of any funding requirements not met by debt is intended to be sourced from equity.

13.2 Project Delivery

• All of the key personnel involved in the Phase II expansion project have significant experience in the delivery of complex global mining, infrastructure and construction projects with specific knowledge and understanding of graphite processing and industrial minerals across the group.

• The two phase nature of the project also mitigates the project risk. The Phase II and Phase III expansion is being built off the base of an existing operational Phase I processing facility with committed customers and sales.

14. Recommendations & Opportunities

• A series of recommendations were made and opportunities identified in the Feasibility Study. These include a number of commercially sensitive and strategic opportunities for Valence Industries.

• Included in those recommendations and opportunities were the following conclusions:

• It is recommended that Valence Industries conduct a review of optimisation alternatives before commencing significant construction activities. Key among these items is the more recently identified customer driven need for Advanced Product Handling facilities close to Port Adelaide. The location of such a facility is influenced not only by economics, but also Government requirements and its support for value adding opportunities. These discussions mean selecting the best location needs careful consideration and may change the mix between capital and operating costs for this facility. These discussions by their nature could take several months.

• Recent testing of the Uley Pit 2 ore has identified how a proven overseas minerals treatment technology could be adapted for Uley Graphite[TM] , including for the unique very high grade Arterial Flake[TM] . It is recommended that assessment of these technologies occur for the purpose of further reducing the capital and operating costs, particularly for crushing. This work can happen in the normal time frame for Valence Industries’ financiers and their independent experts to review the project and for detailed design and equipment selection to take place.

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15. Disclaimer & Forward Looking Statement

Copyright in all material contained in this release is owned by Valence Industries Limited.

Valence Industries confirms that it is not aware of any new information or data that materially affects the information included in this announcement and that all material assumptions and technical parameters underpinning the estimates in this announcement continue to apply and have not materially changed since the announcements previously released as “Valence Doubles Existing ROM Stockpiles” (6/8/14), “Uley Graphite Grade Increases to 11.7%” (17/11/14) and “Maiden High Grade Graphite Ore Reserve” (17/12/2014).

The content of this release is not intended for the use of, nor is it intended to be relied upon by any person, firm or corporation, other than Valence Industries. Valence Industries denies any liability whatsoever to other parties for damages or injury suffered by such third party arising from use of this release by them, without the express prior written authority of Valence Industries. This document is subject to further restrictions imposed by the contract between Valence Industries and the various advisors and experts engaged by Valence Industries and these parties' permission must be sought regarding use of any information contained in this release in all circumstances.

This release contains "forward-looking information". All information contained in this release that is not clearly historical in nature may constitute forward-looking information. Generally, such forward-looking information can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved". Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the company to be materially different from those expressed or implied by such forwardlooking information, including but not limited to: (i) volatile stock price; (ii) the general global markets and economic conditions; (iii) the possibility of write-downs and impairments; (iv) the risk associated with exploration, development and operation of mineral deposits; (v) the risk associated with establishing title to mineral properties and assets; (vi) the risks associated with entering into joint ventures; (vii) fluctuations in commodity prices; (viii) the risks associated with uninsurable risks arising during the course of exploration, development and production; (ix) competition faced by the resulting issuer in securing experienced personnel and financing; (x) access to adequate infrastructure to support mining, processing, development and exploration activities; (xi) the risks associated with changes in the mining regulatory regime governing the resulting issuer; (xii) the risks associated with the various environmental regulations the resulting issuer is subject to; (xiii) risks related to regulatory and permitting delays; (xiv) risks related to potential conflicts of interest; (xv) the reliance on key personnel; (xvi) liquidity risks; (xvii) the risk of potential dilution through the issue of common shares; (xviii) the Company does not anticipate declaring dividends in the near term; (xix) the risk of litigation; and (xx) risk management. Forward-looking information is based on assumptions management believes to be reasonable at the time such statements are made, including but not limited to, continued exploration activities, no material adverse change in metal prices, exploration and development plans proceeding in accordance with plans and such plans achieving their stated expected outcomes, receipt of required regulatory approvals, and such other assumptions and factors as set out herein. Although the Company has attempted to identify important factors that could cause actual

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results to differ materially from those contained in the forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such forward-looking information. Such forward-looking information has been provided for the purpose of assisting investors in understanding the Company's business, operations and exploration plans and may not be appropriate for other purposes. Accordingly, readers should not place undue reliance on forward-looking information. Forward-looking information is made as of the date of this news release, and the Company does not undertake to update such forward-looking information except in accordance with applicable listing rules and securities laws.

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