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.

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.

Gulag Capital Partners – Eurasia Mining report

Key Summary

Recommendation BUY
Target price – 70p GBP (+870% vs current share price of 7.20p GBP)

This is very worthwhile reading if considering an investment into EUA. Concise summary of events, detailed risk analysis and considered opinion.

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Gulag CP - Eurasia Mining - 07 March 2020

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Disclaimer

Please remember, the value of any investment can go up or down and this article should not be taken as investment advice.

Can Eurasia cover the million ounce Palladium deficit?

With 15 million ounce reserves, it could sort the deficit out for 15 years or so.

Extra potential in wider area for 40 million ounce

Financial Argument

1Moz a year would need a plan to mine 32 tons PGM a year…

Once built, it would yield EBITDA approx $2bn a year net profit assuming AISC of $325/Oz and Pd price around $2325/Oz

Using 5x average as mine life is 15 years, the mine would be worth about $10bn or £2.75 a share for Eurasia Mining when you take into account the 80% ownership

A discussion on Eurasia Mining

The darling of AIM over the last few months, generating more comments, tweets, bulletin board posts than any other share. Founded in 1995, they are a precious metals mining firm with two main areas of interest at Monchetundra and West Kytlim, both in Russia. Low cost, open pit mines with stable power supply and steady political background.

For background information on the company, visit their website at www.eurasiamining.com

Where has share price growth come from?

Lets examine the RNS timeline for EUA :

Increasing from 0.4p in Mid October to 7.2p at time of suspension on 10th February, many investors have profited already. The question remains where it is going to end up at this year.

Where is it heading next?

As Eurasia transitions from exploration and small scale mining to a larger entity, the company has gone into a lockdown of sorts whilst they are assumed to be negotiating the sale of assets. We have had a few pieces of information courtesy of the recent articles in Kommersant :

Key takeaways from these articles are an expected EBITDA of $250m based on 4 tons a year production at Monchetundra, with now another 2 tons of production at West Kytlim to add to their healthy basket of Palladium, Platinum, Rhodium, Copper, Cobalt and Nickel.

I’ve taken the recent suspension to give a fresh perspective on the events of last 3 months. I have extended my timelines on the process of a sale to reflect the complexity and number of different types of bidder who will have differing areas of interest in Eurasia Mining.

“Physical shortage is coming faster than expected” – whilst some wise people have predicted this event would arrive, the mainstream have been oblivious to PGM shortages until this month. This was the key thought for me that unlocked a new way of looking at things.

The shortage coming faster than expected has opened new options. It now makes a lot more sense to attract more interest before letting people bid. Whilst shares are suspended, everyone is locked in and waiting for updates.

Once you have a bid it is harder to get the share price higher compared to leaving things a while and the first bid being bigger. Every week the prices of Pd and Rh are increasing… 

So there we have it. In a couple of years time when both mines at MT and WK are fully operational, you could expect EBITDA between $291m and $437m based on 4 and 2 tons respectively. This is based on approved production plans involving SinoSteel, along with the lowest AISC seen globally in PGM space, approx. $325 per ounce.

Appropriate multiples for a PGM mining outfit are open to debate, the following link gives a good guide to many sectors, so it was felt 9.5x would be a good target to aim for with EUA :

Referencing the tables above, a market valuation of between $3.6bn and $6.7bn is achievable under full production plans. Obviously Eurasia are not at this stage yet, but it won’t be that long in the grand scheme of things, whilst Palladium remains in deficit especially so.

So in conclusion, how much will someone be willing to pay to secure :

  • 15Moz of Palladium Equiv
  • 298,000 tonnes Nickel
  • 229,000 tonnes Copper
  • 11,300 tonnes Cobalt

Is it any wonder people consider EUA a bargain at current prices. When the CITIC tweet is clarified, there will be a lot of interest in taking part in the next phase of action for Eurasia Mining.

Disclaimer

Please remember, the value of any investment can go up or down and this article should not be taken as investment advice.