After the surprise RNS Friday 26.3 after hours, I thought it would be useful to try and make some sense of events and how they fit in with what we already know. I won’t go over ground covered brilliantly by others such as Alta_Traako here. We are witnessing the birth of a new district for PGM mining, at a time when rivals are struggling and historic deficits are scheduled to widen.
I think the best approach is to treat this JV in isolation, but also reflect on how it impacts on existing valuations as it is now impossible to ignore that Eurasia have clearly made a good impression on the Russian State. Anyone looking to buy the company has the extra reassurance that they are buying a ESG focussed, Govt approved entity, with connections at the highest levels. A JV like this is not done overnight and Rosgeo work with the major players globally, it neatly explains why the delays in FSP mattered.
Eurasia are now empire building on Kola Peninsula, making the most of the opportunities presented by Nornickel flooding woes and AISC in lowest quartile globally for production.
I believe you can make the case now for reducing the WACC to 17% at Monchetundra on the basis of the State support shown to the company and the flank approval since last time ACF valued the company. This revises the valuations slightly.
I strongly believe they are doing this to boost the final sale, by wrapping up additional areas around Monchetundra, they are giving a buyer confidence they have the area to themselves. Whether it ends up being Nornickel or a new player in Russia, they are buying a lifetime supply of PGM with 100 years LOM if they wish – or an even bigger mining plan than the 1Moz is on the way…
How do you value the option to acquire 75% of 104.6Moz Pt equiv ?
Option 1 – In-situ valuations
Using latest spot pricing of $1180/oz for Platinum (and why did they present resources in Platinum, we want to know what other metals are there – seen some Rhodium mentioned today!), calc as follows :
$1180/oz * 104,600,000 * 75% = $92.5bn approx
What is that worth to EUA though ?
If we are working on minimal information, a ready rule in gold exploration is to use $20/oz for inferred resources, $30/oz for measured and indicated and upwards of $150/oz for proven and probable resources.
So which category does the 104.6Moz fit into? I make the case for it being closer to measured and indicated category, given Rosgeo and Absolute Precision were working the areas just last December (looking back a clue something was happening!)
We can only work off given information though, so I take $20/oz for now :
$20/oz * 104,600,000 * 75% = $1.56bn approx
Two alternative options are to take a percentage of the current In-situ value and apply that to the JV area. Working with known data for Monchetundra reveals at 28p share price we are currently valued at 3.4% in-situ assets. I believe this is currently undervalued and a 5% of In-situ would be an appropriate upper limit for the size of resources at Kola.
3.4% * $1180 * 104,600,000 * 75% = $3.14bn
5% * $1180 * 104,600,000 * 75% = $4.68bn
So as soon as the company progress with the JV and we get details on exploration licencing, I would be happy proposing a value of between $1.5bn-$4.6bn to the JV based on a sensible % of in-situ asset values.
The key for me is that they progress asap on this, especially if the flooded mines in Norilsk are out of action for a year or indefinitely. If potential becomes reality, the numbers get bigger!
Option 2 – EBITDA multiples
Lets fast forward a few years, whoever owns the assets have brought them into production and they are producing min 1Moz a year PGM, using Pt equiv to be pessimistic. With 104.6Moz to play with, a 100yr LOM gives a lot of certainty to the owner, so a 9.5x EBITDA multiple (mining industry average) would be appropriate. I assume the same $350/oz AISC as given by the company for Monchetundra.
($1180 – $350)/oz * 1Moz Pt * 75% = $622.5m a year profit before tax (EBITDA)
However, who is happy with mining for 100 years, better to make the most of your opportunity and scale up further. The following table presents some numbers to choose your favourite from :
So in summary, a fully producing JV, assuming the 75% ownership, would be generating between $622m to $1867m profit a year, valued at between $5.9bn and $17.7bn depending on how much they scale up.
Option 3 – Net Present Value NPV and Free Cash Flow FCF
This is the best option for valuing a mining project, but we need more data to make this accurate! Again, it is speculating a few years down the track about intentions and plans. Are they planning to use the facilities at Monchetundra or build additional ones. As I suspect these 9 areas are all intended to be sold together with MT, I will value it very roughly on the basis it doesn’t need much capex to bring to life, beyond what is planned for MT.
Please note though, without a bigger mining plan, we are only using up 20% of the available resources by 2049, so this will seem pessimistic in comparison to other methods :
Option 3.1 – Mine 19.5Moz by 2049 at 75% owned (25 years production from 2024)
Estimated free cash flow of $14.1bn, net present value $1.8bn, still got 85Moz of Pt equiv left worth tens of $ billions in-situ !
Option 3.2 – Super Turbo Beast Mode – buy out Rosgeo and mine the lot in 25 years
Based on 104.6Moz Pt equiv – estimated free cash flow of $68.7bn, net present value $16.5bn
Based on 50Moz Pd equiv (alternative estimate of resources – guesswork) – estimated FCF of $32.4bn and NPV $8.9bn
Shows why we need a full mining plan to use accurate valuations and details of the resources to be mined. Please note, annual global production means this is unlikely to ever happen but it pleases the uber bulls to see the potential! This also backs up Option 2 valuations based on EBITDA at the upper end.
Tackling the naysayers and doubters
To answer a challenge I’ve seen posted around, EUA haven’t spent $0.5m for 75% of the 104.6Moz, it is an intial payment that grants exclusivity on the 9 areas for 24 months. Anyone claiming this is the worth of all that PGM is not worth listening to!
The relevant part of the RNS makes it clear enough what is going on:
It doesn’t mean the FSP has failed either, nor does it mean it is further delayed. Simply put, it is in full swing until an official RNS is released either confirming a sale or an end to the process. The company are very bullish about prospects when you read the comments made by Chairman and CEO :
Another negative comment has been about the cost of acquiring the licences they need and what valuation will be apportioned to the project. Thankfully, Eurasia have done this before, most recently back in 2018 when MT got a mining licence.
If we allow a little inflation, the £48.8k paid for 20% deposit on the licence scales up to a deposit of £500k for 9 licence areas. So it looks like Eurasia have paid the correct deposit for the options if they were buying in open market. This would mean Eurasia need to find another £2m if the relationship is linear. At this time I am uncertain whether the fee is linked to the area of resources though, in which case it would be slightly more once we know the specific area details.
Given they mentioned cash of $6m, they either have enough or they don’t, I assume if they are proceeding along these lines, either Eurasia or the new owner will reveal such matters at the appropriate time. It is insignificant to the value on offer once licences granted.
Summary of Valuations
If you made it this far, well done!
Since I last calculated things, GBP has strengthened against USD, meaning there are some differences. That said, external events can have a bigger impact on these numbers. If the Nornickel mines are lost for a year or more, then expect Platinum and Palladium to be a lot higher in price soon.
In terms of the Kola JV, I didn’t want to jump straight to fair value once the licences are all granted. I think this is a given, but appreciate it will take some time and money to get there. As you can see though, it will be well worth it!
In terms of a short term valuation, clearly we should be moving up from 28p towards the fair values assigned to the various projects EUA have underway. What happens next is down to the market of course, but for potential alone I wouldn’t be surprised if we reach all time highs in the coming weeks.
The FSP is in full swing, Eurasia are carrying on business and adding value to Monchetundra with this new JV, I can only applaud their strategy and execution to date.