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.

Zak Mir – EUA write up

The Life Of A Chart: Eurasia Mining (EUA)

Interesting read for anyone already invested or considering an investment in Eurasia Mining LON:EUA

Target price of 70p

As I write this mid August, we have news about Monchetundra flanks to look forward to, along with any updates about the bidding process UBS and CITIC are engaged to deliver. So plenty of fundamentals to support the rising channel.

I’ll forgive Zak for being 8p short of my own targets, plenty of time for a new chart as the weeks progress 👍

EUA – Potential Bidders

Whilst many assume Norilsk Nickel (NN) are the overwhelming favourites to purchase Eurasia Mining, other valid options are open and in play.

NN are mentioned in recent EUA RNS, proximity to Monechtundra being an obvious advantage for them. They have all the processing facilities needed just a few km away from the licenced area.

Other firms in the vicinity include Polymetal and Nordgold, they understand the jurisdiction so have to be considered on this basis.

Anglo American have to be considered a strong possibility to make a bid, given the past relationship with Eurasia Mining. Previously they’ve ruled out acquisitions outside South Africa but the recent purchase of Sirius demonstrated a change in approach.

Other global firms such as Glencore who could easily afford a multi-billion offer can be thrown into the mix until such a time as final bidders are revealed.

Chinese influence cannot be ignored on any global asset sale, with the engagement letter with CITIC Merchant an example. Perhaps a state bid via SinoSteel or similar firm.

Many other PGM mining operations exist and would see Monchetundra (MT) and/or West Kytlim (WK) as attractive options to consider purchasing. We should consider South Africa as beset with fundamental issues of power stability, higher than average AISC due to deep underground mining and Covid19 an issue at present with this type of operation. The ratio of Platinum:Palladium at several SA operations is closer to 1, so they would be mining a lot of Platinum to extract a similar quantity of Palladium compared with MT, devaluing one commodity chasing gains on another.

This brings Sibanye Stillwater, Implats, Northam and Lesego to the table of possible bidders. The latter two probably more suited to buying WK as question marks over their ability to afford both MT and WK.

Open Pit mining with AISC around $325/oz makes MT one of the most profitable locations to build a PGM empire. This brings to the table our friends in North America, such as Barrick and Kinross if they wished to consider diversification.

So they would be my top 12 bidders for Eurasia Mining. I don’t expect all 12 to throw in an offer, but it does suggest a potential bidding war until the expert guidance of UBS, ensuring a great outcome for shareholders new and old.

Share price is 19.7p at time of writing, the author holds a fairly large position in the company and has added since suspension ended on 9th July.

Eurasia Mining – what happens next?

As I write this on 5th July, anticipation is clearly building for the coming weeks and months ahead.

So where are we at, what might happen next?

Potential Bidders – reasons to buy

Without naming names, any major PGM mining operation will have taken a look at Monchetundra. With a low AISC of $325/Oz and production cost in roubles, but sales in dollars, it is a very attractive addition to your weaponry compared with equivalent resources in South Africa that have AISC of $700/Oz or more, or North America with AISC $400-$500/Oz. When operational, it will be one of the most profitable mines globally, with soft rock open pit mining offering many advantages over deep pit mining, especially when it comes to Covid19 with segregation of operatives, less power needed and a processing facility already operated by Norilsk a few miles up the road.

It has longevity too, expected local authority approval will see 15Moz available to mine, potential for another 4Moz and then up to 21Moz in the surrounding area. This could sustain a 1000Koz operation for 40 years or so. Enough time to justify a multi billion dollar takeout in 2020.

Two types of Bidder

1. Those who don’t care about the share price – they just want to make an offer for the asset(s) – happy days!

2. Those who care about the share price – the Board will not sanction a large offer for more than 2-3x current share price. The argument being why offer $bn’s when the company is valued at $210m or so.

I’ve seen a lot of discussion about this recently, especially since UBS came on board, presumably on a success fee basis like CITIC and VTB were appointed to examine options. Many people feel we won’t come back to the market, as an offer has already been made. Whilst this is attractive, it could only have come from somebody in the (1) camp – they didn’t care about share price.

Why I want trading to resume

To increase the number of potential bidders! For UBS to work their magic alongside our Board, they need as many companies as possible to be able to bid. If the share price heads to 20p and above, it will enable everyone to justify to themselves why they are bidding. Those interested in buying an asset and those using Market Cap to guide their bids.

Triggers to help Share Price rise

Just appointing UBS will help the share price, it was a clear sign of where things are headed.

Flank Approval – although said to be a formality after MOD and FSB approval, it will remove another doubt and enhance things

Institutional Buying – whether Special Situation funds, wealthy PI’s or Event Driven Global Merger Arbitrage funds, many different entities have now got reasons to invest. With a timeline measured in weeks, the chance of a great return on their investment is looking increasingly likely

Shorts closing – should EUA have been targeted at 4p or 7p, there are many whispers about a few million shares being borrowed. Will need repaying! A small amount in the grand scheme of things but an expensive lesson for anyone caught on the wrong side of the investing fence.

Against this, we will see some selling of shares. I mention this in acknowledgment of the fact some will need to gain access to their cash as a result of circumstances changing since Covid19 came onto the horizon and smashed up 2020. I wish everyone well who has been affected financially, not a nice situation and I hope EUA has made you something along the way.

1-2-3-4 I declare a bidding war

Deserves a mention to close the post, for anyone who hasn’t been involved in a share with a bidding war, just grab some popcorn and enjoy the show. Assumption is that Norilsk Nickel will not allow Monchetundra to fall into a rival’s clutches, but they don’t want to pay more than they need to.

Should we have 5,6, 7 seriously interested parties, they might not have an option. Back in 2007 when LionOre was up for sale, they outbid Xstrata twice. That was a two horse race, yet share price increased significantly for shareholders. More bidders will mean more rounds of bidding. The kind of thing best handled by a global bank with experience in such matters, exactly why UBS was brought on board…

They don’t buy often, but when they do, they make sure they get the asset they want. Hence I will stick by my predictions below, good luck to all invested.

Novacyt – Testing is here to stay

With Covid19 still dominating global headlines, thought it time to update the valuation charts to reflect the role test/trace/isolate is having as we attempt to unlock communities and repair the economic damage.

Novacyt have launched two new products in June, Exsig™ Covid-19 Direct and Exsig™ Mag

Both of these are designed to enhance workflow in the lab. Exsig™ Direct is an innovative and proprietary RNA extraction reagent that removes the need for complex, automated magnetic extraction systems. Exsig™ Mag is Novacyt’s RNA extraction reagent containing magnetic beads to be used in laboratories which still wish to run their automated RNA extraction systems. , along with a third new product, a high throughput test called COVID-19 HT (details to be released at time of writing)

This seems to be a natural development from their gold standard PCR test launched earlier this year. Making easier the compatibility between other manufacturers’ products.

The development I think changes the game though, is the mobile COVID-19 testing solution. As per recent RNS, we know it is a combination of Exsig™ Direct and the COVID-19 test optimised to run on the Company’s proprietary q16 and q32 instrumentation. The mobile COVID-19 system will launch in July 2020.

Why am I interested in this above all else? Simple, if they can open up new markets, they increase sales. Having the gold standard Covid-19 test available where it is needed, will enable large scale events to take place again with confidence. Already we are starting to see this trend develop. Whether it is countries insisting on a recent Covid-19 antigen test result (Tunisia), or Airlines seeking ways of ensuring passengers are safe to travel (Emirates in Pakistan), the need to conduct more testing is apparent.

Mass testing will work best if it is done by professionals, using kits that are as close to 100% accurate as possible. Done in places where large numbers of people wish to congregate. If a small 5% sample is taken at every event, followed up as quickly as possible by a trace and isolate service, we can unlock the world to some extent and focus on hotspot areas as they flare up rather than a mass lockdown scenario.

Valuation Update

If testing continues at current levels, it would inevitably fall through competition alone. The new product range will enhance the attractiveness of PCR testing again, recognising the near 100% accuracy compared to other as yet unproven methods. This will offset decline to some extent, but launch of mobile testing will provide additional revenue through 2021 and maintain margins.

This could result in EBITDA around £390m for FY 2020, and £520m for FY 2021. After taxes, a large cashpile around £700m would be generated for the company to invest or return as dividends.

At current predictions, a conservative price of £5.80 per share by end of FY 2020 and then £10.45 per share by end of FY 2021 seems a minimum based on cash and little sentiment.

Next update remains key – if they are closer to £200m in revenue these predictions will gain greater accuracy, otherwise happy to remodel as appropriate.

Appendix – chart data in full

 Test Capability 2020 * inc new products
 January  February  March  April  May  June  July  August  September  October  November  December 
 Tests (m) 002481012141212126
 Cumulative 00261424365062748692
 £m Revenue 001751119204306425527629731782
 EBITDA £m 008.525.559.5102153212.5263.5314.5365.5391
 Test Capability 2021 
 January  February  March  April  May  June  July  August  September  October  November  December 
 Tests (m) 14181814101010108642
 Cumulative 14325064748494104112118122124
 £m Revenue 119272425544629714799884952100310371054
 EBITDA £m 59.5136212.5272314.5357399.5442476501.5518.5527
second wave   

What will the next RNS contain?

As entertaining as it is seeing the bot flies neutralised on certain websites, thoughts should be more to the positive, ie the next RNS and events ahead.


I’ve got a few contenders I’d like to see, in no particular order :


1. Fuller Explanation of reasons for suspension, CITIC engagement letter signed off and a date for trading to resume (could be amazing – ie bidding process starting)


2. Licence approval at WK – Tipil (seems to be done deal judging by website updates as per screenshot below)


3. Flanks approval at MT (the game changer for reserves)

I don’t think we will see more board appointments, but always open for a pleasant surprise. Some of the theories I’ve seen and heard :

a) 2 stage bidding round with 8-9 firms interested
b) special situation funds x2 taking a min 3% stake and TR1 announcements soon after relisting
c) PGM hedge funds interested in purchasing a stake
d) other banks trying to outdo CITIC and VTB to get involved as not so many M&A deals this year

Facts vs Opinions

Timings

Unlike some special people who claim to know the ins and outs to within a few minutes, I prefer to consider what is likely in the coming weeks and months. Our Board of Directors are professionals, the notion of a leak is not worth considering.

Nomad RNS – Whilst it would have been better to stick to original timings, this didn’t happen. Not the end of the world. Now we are in a period without a Nomad, it makes some sense to wait until w/c 25th May to announce the Nomad appointment, gives the company longer to add extra information about flank approvals or opening bids.

When trading resumes – some people will want to sell, many investors and funds will wish to buy, share price will react accordingly. Rose 100% in the couple of weeks before suspension so no reason to doubt this will stop. Could see 15-20p by end of June if buying pressure continues.

Sale of Monchetundra – main asset to be sold, expect to see some bids this summer that recognise what 15Moz of Palladium are worth over the next 20 years (over $25bn after AISC of $325/oz taken into account). Norilsk Nickel in pole position with proximity (as recent RNS kindly reiterated). Max price once flanks approved $2-2.5bn

Sale of West Kytlim – keep producing until it is sold to maximise revenue. No need to sell on the cheap, expect minor producers to be interested. Makes sense to sell at similar time to Monchetundra if suitable bid received. If recent plans to increase production are feasible, expect Max price $500m

So as many others have said before, Eurasia could be worth up to $3bn when sold in full. So much room to grow from current 7.2p, look beyond the Nomad ‘issue’, once it is sorted it will be full steam ahead…

Why Monchetundra could be worth >$14bn by 2026

So we know from RNS that West Kytlim is planned for eventual scale up to 2tons a year, probably to show what it is worth to a new owner.

We know there is a ready to go plan for Monchetundra involving SinoSteel for around 4tons (approx 125Koz) a year. Alexei Churakov gave a Kommersant interview in January stating likely EBITDA of $250m from this.

What would happen to share price upon resumption if a similar scale up plan has been devised for Monchetundra to take advantage of the 15Moz resource with flank approval granted?

No point digging out 150kz a year, you’d be there 100 years!

It would make more sense to see them aim higher, maybe a plan for 780Koz so life of mine is around 18-20years. This will take a few years to achieve, but the low cost nature of extraction via open pit will mean new owners can start production by 2021, maybe 2022 at the latest.

Higher potential EBITDA – $1.5bn to $2bn a year means much higher company valuation.

Allow a hefty discount for building the bigger facility, probably around $1bn, you’d still be looking at $4-5bn to ensure you secured the asset that will generate $15-$20bn over less than 20 years.

(This is conservative as well – 15MOz at Pd price each year, less $325/Oz costs)

This may mean some investors need to be a little patient whilst the plans are drawn up. It doesn’t mean Eurasia will be activating the plans, think of it as a feasibility study.

It is very hard not to be optimistic about the future when you work out what this vast resource will yield.