Concerns over agreement with MinRes 

Over the past year, HZR’sshare price has fallen 60% from an October 2017 high of A$0.68. We attributethis to the lack of disclosed progress on the binding Co-operation Agreementwith Mineral Resources (MinRes) (ASX:MIN). Initial plans were for a 1tpaultra-high purity graphite pilot plant to be commissioned by the September 2018quarter with commercial production (funded by MIN) targeted for end-2019. Unfortunately,no progress details were included in the March 2018 quarterly cashflow report(released 30 April 2018), or in the group’s most recent announcement (10 May2018) which described the positive performance characteristics of HZR’sgraphite versus commercial graphite in a series of Li-ion battery tests.

Areas which concern us over MIN’s “commitment” to the Co-operationAgreement with HZR include:

• MIN’sunsuccessful bid for oil and gas producer AWE Resources. Natural gas is themain input cost in the Hazer Process (HZR’s proprietary process for converting,at moderate temperature and pressure, natural gas into hydrogen and graphiteusing iron ore as a process catalyst). Buying gas at market prices (vs capturedsupplies) will increase input costs.

                •  MIN’sMarch 2018 binding Heads of Agreement with graphite developer Hexagon Resources(ASX:HXG). Under the agreement (49% HXG, 51% MIN) MIN will fund the developmentof the McIntosh Graphite Project in Western Australia via MIN’s proven buildown operate model; commercial production of graphite concentrate is targetedfor mid-2021. Importantly, HXG has developed a proprietary medium temperaturethermal purification technique and produced graphite at the high-valueconcentrate grade of +99.999 wt%C (“five nines”). MIN is undoubtedly a believerin the future of the Li-ion battery and clean energy in general. While it isnot unreasonable to believe that MIN is “hedging its bets” between syn-graphiteas represented by the Hazer Process and conventional mined and processedgraphite (via HXG), we suggest that MIN’s investment in HXG may lead to projectslippage at HZR.

                • Theresignations in April 2018 of company founder and Managing Director GeoffPocock for personal reasons, and of Non-Executive Director Terry Walsh due toother Board commitments.