Eurasia Mining – Sept 2020 – updated valuations

After the approval of the exploration licence for Monchetundra flanks, it is fair to suggest some of the risk in bringing this project to fruition has reduced. West Kytlim is producing in 2020 so I thought it was worth revisiting my WACC/NPV model to see what may be ahead for investors. To that end, I offer 3 calculations, ranging from a very conservative case, my own considered opinion, then finally a bullish case.

I want to acknowledge the flank approval matters. It is a big step forwards for Eurasia Mining. That said, we don’t have a new resource figure to work with, even though I’m sure the strike area at NKT will see this figure increase. The 48400m of drilling data will no doubt take time to process to modern standards and perhaps lower cut off points. So until the company releases an RNS to confirm a resource figure, I will use the 15Moz.

Previous assumptions I’ve made are that it would cost around $750m to build the bigger mine capable of extracting 1000Koz a year, as indicated in the revised plans issued by Eurasia Mining. I have allowed a 1% increase in Palladium which is pessimistic but allows for the price to fluctuate within these parameters and previously used $2000/Oz as the starting point.

Monchetundra – Conservative Case – 46p per share target

This remains the same as my earlier work, using 30% WACC (Weighted Average Cost of Capital) and $2000/Oz for Palladium yields NPV of $2.1bn and equiv share price of 46p when converted

Monchetundra – GMF78 new prediction – 94p per share price target

Palladium is rising again, emission standards will ensure the next 15-20 years will see rising demand once the massive impact of Covid19 has worked through the system. I feel an average of $2200 is reasonable as a starting point for NPV calculations. I’m reducing the WACC to 20% to reflect progress made, but acknowledging it will take time and effort to build a mine of the scale proposed. (Hopefully by the new owner!)

On this model, we see a Free Cash Flow of $24.2bn generated by 2038, with equivalent Net Present Value of $4278m (there’s that number again!)

Monchetundra – Bullish Case – £2.32 per share price target

Now the flank approval is through, the 30% WACC is perhaps excessive and should be reduced to reflect a step closer to full production. How much to reduce is of course a matter of opinion, but 10% WACC would be as far as I would take this. The results are dramatic though. If we uplift the starting Pd price to $2500 as well, I couldn’t make a case for using higher numbers, so this becomes the upper limit on my calculations.

Monchetundra – work out your own valuation!

Thought it might be handy to have a table covering the possibilities in between my conservative and bullish case. Note it isn’t a linear relationship when assessing NPV for an asset, with WACC having a bigger impact. The cheaper you can bring a project to realisation the more profit lies ahead really.

West Kytlim – 17p share target price

We shouldn’t ignore the potential of WK to add value to a full takeover, it also provides a fall back position should the company not like the size of offers. Actively mining in 2020, with the benefit of the $10m to bolster production, I assign a fair value of 17p to this project now, based on being in production and working towards 1Moz total yield.

Summary

Given I have predicted 78p takeover since last November, I could keep saying the likelihood is increasing and leave the figure as it was. However, it is impossible to ignore the flank approval and rising palladium price.

Revised total takeover price of 94p – 111p for the whole company based on current information. Willing to revise should new information come to light. It is clear to see why UBS was engaged, this is going to be one of the biggest deals AIM has ever seen. Simply put, when an offer RNS lands, you will have to hold your shares to benefit as the rerate will be almost instant.

Leave a Reply

Your email address will not be published. Required fields are marked *