Prospect Resources : Quarterly Activities and Cashflow Report December 2021

ASX.PSC FRA.5E8

ASX ANNOUNCEMENT

28 January 2022

For personal use only

QUARTERLY ACTIVITIES REPORT

FOR THE QUARTER ENDED 31 DECEMBER 2021

Prospect Resources Ltd (ASX: PSC, FRA:5E8) (Prospect or the Company) is pleased to report on activities undertaken during the December 2021 quarter.

Summary

• Completion of Staged and Direct Optimised Feasibility Studies for Arcadia Lithium Project (Arcadia)
• Pilot plant continues to produce on-spec product and provide valuable metallurgical recovery data
• Acquisition of Step Aside Lithium Project
• Completion of equity raising via A$18M placement (before costs) at A$0.40 per share
• Executed binding agreements for the sale of Arcadia to Zhejiang Huayou Cobalt Co., Limited (Huayou Cobalt) for US$377.8M:
• • Completion of transaction is subject to Prospect shareholder approval, relevant Chinese and Zimbabwean regulatory approvals and other conditions precedent
  • Subsequent to the quarter end, Prospect has made progress on the conditions precedent (see update below).
  • Expected completion of transaction late Q1 / early Q2 2022
• Prospect was debt free with a cash balance of A$20M1 at quarter end

Prospect Managing Director and CEO, Sam Hosack, commented:

"The transaction announced with Huayou Cobalt is the culmination of a process that generated significant inbound interest amongst potential partners for the Arcadia Lithium Project. The Board of Prospect believes that the transaction offers a highly attractive outcome for Prospect shareholders relative to the timing and execution risks attached to development and operation of Arcadia under either Prospect's ownership or in joint venture, and unanimously recommends that Prospect shareholders vote in favour of the transaction at the Extraordinary General Meeting planned for 25 February 2022."

1 Cash balance excludes US$20m deposit received under the announced transaction with Huayou Cobalt as described in ASX announcement dated 23 December 2021.

Prospect Resources Limited ACN 124 354 329 Level 2, 33 Richardson Street. West Perth WA 6005 E: [e-mail] W: prospectresources.com.au

Project Development

For personal use only

Arcadia Staged and Direct Optimised Feasibility Studies

During the quarter, the Company released the "Staged" and "Direct" Optimised Feasibility Studies (OFS) for Arcadia. The studies were prepared by leading engineering consultants, Lycopodium, with assistance from Prospect and select external contributors. These two studies confirmed the strong technical and economic viability of Arcadia under both a dual-stage and single-stage development pathway to 2.4Mtpa throughput.

Table 1 below presents the key outcomes from both studies. For full OFS details, please refer to Prospect ASX announcements dated 11 October 2021 (Arcadia Staged Optimised Feasibility Study) and 14 December 2021 (Arcadia Direct Optimised Feasibility Study).

Table 1: Key Arcadia Direct and Staged OFS outcomes

ARCADIA OPTIMISED FEASIBILITY STUDY (DIRECT AND STAGE OFS): KEY OUTCOMES

Key metric (100% project basis)	Unit		Direct OFS		Staged OFS
Price deck utilised		High prices	Base prices	Low prices
Annual process throughput	Mtpa	2.4	2.4	2.4	2.4
Initial life-of-mine (LOM) (Ore Reserve)	years	18.3	18.3	18.3	20.0
Average head grade (Ore Reserve)	% Li2O	1.19	1.19	1.19	1.19
Average production -spodumene	ktpa conc.	147	147	147	133
Average production - technical petalite	ktpa conc.	94	94	94	86
Average production - chemical petalite	ktpa conc.	24	24	24	22
Pre-production capital expenditure	US$m	192	192	192	140
Stage 2 capital expenditure	US$m	-	-	-	72
Sustaining capital expenditure	US$m	36	36	36	39
Post tax investment to positive cash	US$m	202	202	202	148
C1 cash operating cost	US$/t conc.	369	357	345	378
All-In-Sustaining-Cost (AISC)	US$/t conc.	376	364	353	386
LOM average SC6 reference price	US$/t SC6	1,019	892	736	736
IRR (pre-tax, real basis, ungeared)	%	72	61	48	35
Pre-tax NPV10% (real basis, ungeared)	US$m	1,399	1,022	646	465
IRR (post-tax, real basis, ungeared)	%	71	60	47	34
Post-tax NPV10% (real basis, ungeared)	US$m	1,268	929	590	408
Average annual EBITDA (post-tax)	US$m	232	175	118	97
Project net cashflow (post-tax)	US$m	3,504	2,597	1,690	1,468
Payback period (from first production)	Years	3.0	3.3	3.6	5.4

Page 2 of 8

For personal use only

Pilot Plant

The pilot plant operated throughout the quarter and a total of 2,236t of ore was treated through the DMS plant yielding 347t of technical grade petalite. The pilot plant optimisation program resulted in an improvement in petalite recoveries to over 55%.

A total of 79t of technical grade concentrate was dispatched to Sibelco during the quarter, with another 136t prepared for dispatch early January due to availability of suitable vessels. The balance of the product will be dispatched during the next quarter.

A second mining campaign was launched in December to provide additional ore for further optimisation test work and around 300t of product for export.

Step Aside Lithium Project

Prospect's wholly owned subsidiary, Promin Resource Holdings (Pte) Ltd, has acquired a potential high grade lithium deposit located approximately 8km north of Arcadia (Step Aside). The Step Aside claim comprises approximately 140 hectares and is located in the Harare Greenstone Belt, west of the Mashonganyika Fault. The potential of the area has been confirmed by positive regional stream and soil sample geochemistry results. Four mineralized pegmatites have been mapped from east to west within a meta-dolerite host rock. These mineralized pegmatites are all roughly parallel to each other, lying in a north-south orientation and have dip angles of 40-45˚ to the west.

Figure 1: Locality Map of Step Aside, 8km north of Arcadia

Page 3 of 8

Exploration program underway, with the commencement of rock chip sampling and if successful a trenching and drilling exercise to help with determining the sub-surface strike extensions. This will provide greater detail as to the thickness and strike length of any potential underlying pegmatite.

For personal use only

Chishanya Carbonatite Project

Following a rock chip sampling program to investigate the potential prospectivitiy of the Chishanya Carbonatite Project (Chishanya) for economic rare earth element concentrations, Prospect does not plan to undertake any further exploration activities on this project.

The knowledge gained at Chishanya has assisted the team in understanding the regional geology and Prospect is evaluating other early-stage projects in Zimbabwe for their prospectivity for rare earth elements.

Other Projects

The Prospect exploration team continue to develop a pipeline of prospective battery mineral targets both locally and within the region. The publicity around the transaction with Zhejiang Huayou Cobalt Co., Limited has resulted in an increase in opportunities being presented to the Prospect team. We look forward to a busy quarter.

Corporate

Binding agreements executed for sale of Arcadia to Huayou Cobalt

On 23 December 2021, Prospect announced that it had, through its 100% owned subsidiary Prospect Minerals Pte Ltd (PMPL), executed a binding Share Sale Agreement (SSA) with Huayou International Mining (Hong Kong) Limited (a subsidiary of Huayou Cobalt (Huayou), for the sale of its 87% shareholding in Prospect Lithium Zimbabwe (Pvt) Limited (PLZ), owner of the Arcadia lithium project (Transaction).

Huayou agreed to purchase PMPL's 87% shareholding in PLZ and associated intercompany loan for approximately US$377.8M in upfront cash consideration. The Transaction represents the culmination of the strategic partnership process undertaken by Prospect since August 2021.

After careful evaluation, the Prospect Board of Directors, in conjunction with its financial and legal advisers, has formed the view that the sale of its shareholding in PLZ to Huayou on the terms and conditions of the SSA delivers the most attractive risk-adjusted,post-tax value outcome for Prospect shareholders, compared to other proposed development options for Arcadia under either Prospect or joint venture ownership.

Conditions precedent update

Completion of the Transaction is subject to several conditions precedent being satisfied or waived, including relevant Chinese and Zimbabwean regulatory approvals, termination of an existing offtake arrangement and Prospect shareholder approval.

In relation to these conditions precedent, Prospect provides the following update:

Chinese regulatory approvals

Page 4 of 8

For personal use only

Huayou has notified Prospect that it has obtained the outbound investment certificate for the Transaction from the Ministry of Commerce of the People's Republic of China (MOFCOM) required for completion of the Transaction.

Application for filing and registration by the National Development and Reform Commission (NDRC) has been submitted by Huayou. Once completing the filing and registration by NDRC, Huayou will apply for the relevant exchange registrations from a qualified bank supervised by the State Administration of Foreign Exchange. These confirmations are expected to be received in due course.

Existing offtake arrangements

Prospect has executed a Deed of Termination and Release (Termination Deed) with Sinomine Resource (Hong Kong) International Trading Co. Limited (Sinomine) with respect to the offtake and marketing arrangements between Prospect, PLZ and Sinomine (Offtake Agreement). The terms of the Termination Deed take effect upon completion of the Transaction. The effect will be that the Offtake Agreement is terminated and Prospect, PLZ and Sinomine are released from their respective obligations, and Sinomine will receive an amount of US$8 million as required under the Termination Deed.

The terms of the Termination Deed only take effect in the event of completion of the Transaction. If the Transaction is not completed, the terms of the Termination Deed do not take effect, and the status quo prevails.

Termination of the Offtake Agreement is a condition precedent to completion of the Transaction. The parties to the Transaction have confirmed that this condition precedent will have been satisfied once the Termination Deed takes effect, and Huayou has confirmed to Prospect that it will not rely on this condition precedent as a reason not to proceed to completion if all other conditions precedent have been satisfied or waived.

Prospect shareholder approval

Prospect has obtained a 2 week extension (from 8 weeks after the SSA to 10 weeks) of the time to hold an extraordinary general meeting of its shareholders to consider and vote for the Transaction. On 25 January 2022, Prospect released a Notice of Extraordinary General Meeting for a meeting of Prospect shareholders scheduled for 25 February 2022. The Board of Prospect unanimously recommends that Prospect shareholders vote in favour of the Transaction.

For further information, please refer to Prospect ASX announcements dated 23 December 2021, Prospect sells its interest in Arcadia for US$378M, 18 January 2022, Conditions Precedent Update, and 25 January 2022, Notice of Extraordinary General Meeting and Investor Presentation.

Subject to all conditions precedent being satisfied, completion of the Transaction is expected to occur in late Q1 / early Q2 2022.

Equity raising and cash balance

On 29 October 2021, Prospect announced the placement of approximately 45 million new shares to institutional and sophisticated investors at an issue price of A$0.40 per share to raise A$18M in new equity (before costs). The Principle use of funds was to accelerate engineering studies, continue to operate the pilot plant and to progress the partnership process.

Prospect finished the quarter with a cash balance of approximately A$20M. This balance excludes the US$20M deposit received under the Transaction (see Prospect ASX announcement dated 23 December 2021).

Page 5 of 8