Author: gmf78

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…

Valuation Methods

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.

An eventful start to the year with 3 significant RNS updates to consider. I’ll discuss each one below but my main thought is that we are now oversold and undervalued. The resources remain as they were. Non-binding bids are only one step away from an offer the Company could put to shareholders. The company has the DFS approval for West Kytlim which pushes things along. Plus with platinum on a rising trend we shouldn’t underestimate the contribution this mine could make to a future owners’ annual profits.

Having researched extensively with many others since 2019 and gathered the opinions of over 1400 members of our Telegram group, including some of the largest private holders of EUA there, the calmness shown this last week speaks volumes. We estimate to be holding well over 10% of all stock between us. Being able to discuss matters calmly and respectfully has been a great help to many. If you want to join we are fully open, just follow the link :

https://t.me/eua_palladium

It wouldn’t surprise me if we see some significant buying in the next week, also wouldn’t surprise me if the Company release a significant RNS during February. A February timeline would fit with previous mentions I feel. With holidays out of the way, the progress whilst delayed should not be forgotten about. If I decide to increase my holdings in the coming days I’m sure you will spot the buy! I remain as confident as ever in my predictions and wish every investor well in these difficult times.

14 January 2021 – Eurasia Mining Plc – Update on Formal Sale Process

Eurasia Mining Plc (“Eurasia” or the “Company”), the palladium, platinum, rhodium, iridium and gold producing company, is pleased to provide an update on the Formal Sale Process initiated by the Company under the UK Takeover Code.

Since launching the Formal Sale Process on 1 July 2020, Eurasia and its advisers have engaged with a wide range of parties, and have to date received non-binding offers in respect of both a possible acquisition of the Company as well as other transaction structures.

Progress to date has been slower than expected reflecting the complexity of the process, involving several parties and structures, as well as external factors including COVID-19 related travel restrictions, and more recently delays resulting from western and Russian holiday periods. Notwithstanding these factors, discussions regarding proceeding to binding proposals are continuing. Until a transaction is finally concluded there can be no certainty that a transaction will occur or on what terms.

Further announcements will be made when appropriate.

Main points – multiple expressions of interest are now non-binding offers. Looking to proceed to binding proposals. Note the plural there, they are working towards multiple formal offers. For me a sign of a potential bidding war inside the FSP.

21 January 2021 – Eurasia Mining PLC – West Kytlim DFS Approved

…Christian Schaffalitzky, Executive Chairman commented: “The Directors are pleased with the DFS approval, aimed at production increases, and confirming West Kytlim’s position as the world’s largest operation of this type. After significant capital investment at West Kytlim into the production scale up and into the rehabilitation, the cash position of Eurasia is robust with over $7m, while the Company is pursuing its strategy as previously reported. Further announcements will be made in due course”.

Main points – Great to see DFS approval for WK , allows year round operations for the future owner. Good to see cash position still strong, no need to bolster. The key part – “Company is pursuing its strategy as previously reported.”

28 January 2021 – Eurasia Mining PLC – Share Price Movement & Update

Eurasia Mining plc has noted the adverse movement in the Company’s share price yesterday, following announcement of the trade yesterday for 27,400,000 shares by Alexei Churakov (the “Shares”). Eurasia had received no notification of this trade prior to it being reported by Alexei Churakov himself via RNS on 27 January 2021.

The Company and its professional advisers continue to work on the Formal Sale Process as recently reported via RNS of 14 January 2021. The operations of the Company are ongoing with the DFS for West Kytlim formally approved as announced on 21 January 2021.

The Company has made initial enquiries of Alexei Churakov regarding the sale of the Shares, and he has now notified the Company that:

·    he sold the Shares to cover an urgent and critical cash call,

·    all the Shares were acquired by Veles International (“Veles”), a subsidiary of an investment company Veles Capital,

·    he has no intention to sell his remaining shares and/or options.

The Company is continuing with these enquiries.

The Company notes that the acquisition by Veles evidences interest in Eurasia among institutional shareholders. Veles is a well-established and one of the oldest professional institutional investors in Russia.

Main points – Company didn’t know anything about this in advance. Was reported as a single transaction away from the market, at the share price of the time. He hasn’t sold all the shares he could have done.

Deloan Investments is under the control of Dmitry Suschov so consider those shares locked away. Similarly the options cannot be exercised at this time. Anything else is only speculation at this stage and we should await a further update when the company concludes its enquiries.

Clearly this event rattled the markets and confidence. Wasn’t ideal timing to release in market hours and not give the company chance to respond, so the share price took a hit.

But everything else remains as it was on 21 January. The Company points this out in the RNS to reassure everyone about the strategy they are pursuing.

Background

Feb 2020 – Neal ‘the deal’ Froneman suggests Sibanye’s next deal would be away from South Africa and in battery metals. “We want to play in the international arena. We are probably ex-growth in South African because of our market position in PGMs,” he said. He also spoke to Bloomberg about growing capacity in the US market though, making a $5bn acquisition of a gold producer, so not directly linked at this time to Eurasia.

Worth noting though that in the infamous tweet by Michael Hammond, South Africa was listed a country interested in Eurasia.

https://www.ft.com/content/35fc5214-49a0-11ea-aeb3-955839e06441

May 2020 – conditions outlined for Sibanye making acquisitions in future
Namely cutting debt and returning to dividends for shareholders. So perhaps they aren’t going to be buying anyone in 2020, except…

Sibanye’s Froneman says no M&A until debt cut and dividend revived

August 2020 – update on Sibanye H1 results, with impressive profits posted and dividend reinstated for first time since 2016. So the conditions to be met before making an acquisition are in place now. Coped well with Covid restrictions, so expect H2 to be even more profitable as PGM pricing stable.

https://www.sibanyestillwater.com/wp-content/uploads/2020/08/sibanye-stillwater-H12020-results-booklet.pdf

October 2020 – Sibanye announce new executive appointments. Including Laurent Charbonnier.

Sibanye-Stillwater announces changes to executive management

“Laurent Charbonnier will be joining the company and assuming the role of EVP Business Development. Laurent has more than 20 years’ experience in investment banking and recently left his role as Managing director and Global Head of Metals & Mining for HSBC, which he occupied for the last eight years.

He was a lead advisor to Sibanye-Stillwater on the acquisitions of Aquarius Platinum, Rustenburg, Stillwater and Lonmin and their related financing (bridge financing, rights issue and bonds).”

A little research on LinkedIn shows Laurent also worked at Credit Suisse and UBS prior to HSBC, being a seasoned professional in the mining investment community and a track record of financing large deals in the PGM sector.

Also in October, Froneman conducts various interviews stating his level of unhappiness with investing in South Africa, talking about battery metals and how he needs to diversify the company to get closer to supply chains and downstream users.

Froneman won’t “speculate with shareholders’ money” despite “spectacular” PGM project

Sibanye-Stillwater says “downstream exposure” will be part of battery metals deal

https://www.biznews.com/sa-investing/2020/10/30/neal-froneman-3

Summary

Sibanye under Froneman have shown impressive growth over the years, he isn’t afraid to take risks and has given a clear steer on future direction when you combine these interviews and facts.

They are clearly moving towards an acquisition, whether it is a North American Gold producer, or someone in the battery metals space, or PGM away from South Africa.

S&P upgrades Sibanye-Stillwater credit on expectation of “materially higher cash flow”

With their credit rating improved, finding money to fund an acquisition should be easier too.

Eurasia Mining ticks some boxes for them, especially with Monchetundra on the Kola peninsula. Closer to European markets and large car manufacturers, cheaper cost of extraction.

On the downside, it doesn’t have a lot of gold or as much nickel/copper as other assets.

But the chance to take a crown jewel right on the doorstep of Nornickel, showing Potanin he has a rival, well that might just be the extra ammunition Froneman needs to pull off the PGM deal of the century.

So who will they buy, will it be Eurasia Mining?

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.

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 👍

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.