The past two years have been particularly busy for Russia-focused precious metals business Eurasia Mining (LSE:EUA). As well as delivering record platinum production and posting a maiden gross annual profit, the company has taken major steps towards bringing its significant Monchetundra palladium project 'into a different league of Platinum Group Metal (PGM) producers'.
Despite this, the firm has struggled to gather much market momentum since January, with shares currently sitting at just under 0.50p each. This price is towards the lower end of its 52-week range and values the company at £12m. Here we look at what could reinvigorate this stock over the coming months.
Platinum production growth at West Kytlim
Eurasia’s most important asset is West Kytlim, a producing palladium, platinum, iridium, rhodium and gold mine based in Russia’s Ural Mountains.
West Kytlim is a significant source of cash flow for Eurasia, helping the business to post a maiden gross profit from operations of £292,000 last year and freeing it up to pursue the development of its other assets. 2018 not only saw the mine enter industrial-scale output for the first time, but also saw it outperform Eurasia’s forecasted production volumes and grades considerably. Indeed, the mine produced a total of 165kg of raw platinum throughout its active months – an average of 1.146kg a day - compared to an expected 100kg of raw platinum. This output translated into production revenues of £2.57m against a total of £180,000 in 2017.
Development strategy at West Kytlim
As well as maintaining production, the last year has also seen Eurasia work to develop West Kytlim into the largest soft rock PGM mine globally. It is currently the second largest behind the Kondyor mine operated by Russian Platinum, which is thought to be winding down after producing an impressive 275kg of raw platinum last year.
Eurasia's expansion efforts have taken several forms. In December last year, the company revealed that it had been granted an additional 71.1km2 exploration licence at the project. The ground is thought to have the potential to bolster West Kytlim’s resource base and life of mine considerably. Following this, in June, Eurasia announced that it had applied for another licence called Tipil in the West Kytlim area. Tipil contains around 17km of river course and sedimentary units that have been proven to host platinum group metal deposits. With Tipil covering 24.5km2, West Kytlim’s total project area will grow to 117km2 when Eurasia is granted the Tipil licence formally.
Eurasia has had its Definitive Feasibility Study approved for West Kytlim’s Kluchiki area – a revised reserves statement for this area has also been lodged with authorities and is due for approval imminently. Furthermore, the Company aims to upgrade the entire mine's existing reserves into the Russian C1 category through a single ‘aggressive’ drilling programme. This work is fully funded and is on track to be completed by the end of this year. A total of 2,600m of drilling is planned at the reserves occurring as separate areas within the broader West Kytlim deposit. The aggressive reserves upgrade program is part of a ‘phased mine development strategy’ to ensure sufficient mineable material for multiple washplants operating on site from 2020. The business has also made several process improvements to West Kytlim’s washplant aimed at increasing overall recovery of precious metals, and improving efficiencies.
Most recently, in September, Eurasia announced that it has acquired its own enrichment plant and some mining equipment from the operating free cash flow at West Kytlim. The firm will now produce from the asset on an owner-operator basis, meaning it is entitled to 100pc of revenues, up from 30-35pc. As a result, Schaffalitzky expects to see an ‘obvious concurrent increase’ in the project’s profit margin moving forward.
Huge resource upside at Monchetundra
Another key focus for Eurasia this year has been the advancement of its second key asset – the Monchetundra project – towards production. Monchetundra is based on the Kola Peninsula in northwest Russia and contains combined reserves and resources of 1.9Moz (or 59t) palladium equivalent alongside significant quantities of nickel and copper. The asset is slated to enter full production in 2021, lasting until 2038.
According to an Optiva Securities valuation last October, Monchetundra offers a base case NPV(12) of $188m as it stands. The broker expects production revenues to ramp up from $28m in 2021 to $55m in 2022, and $75m annually from 2023 using a $1,000/oz palladium price assumption. However, it is worth noting that these estimates looked particularly conservative in light of current palladium prices, which are sitting way above $1,000/oz at more than $1,600/oz, indicating the potential for even more significant future revenues. The metal is expected to be driven higher by a supply deficit in the face of increasing demand from vehicle manufacturers battling to meet tighter emission standards
Eurasia also believes that Monchetundra offers a considerable amount of resources upside, estimating that it contains an in-situ reserve and resource value of approximately $2.1bn across two open-pittable locations.
Bringing Monchetundra towards production
Eurasia has made exciting progress over recent years at Monchetundra. Firstly, it was able to secure an engineering, procurement, and construction (EPC) contract for the project with Chinese company Sinosteel. This includes a financing package that will cover the majority of the project's $176m total capex requirement in the form of a $149.6m 10-year loan. Meanwhile, a $50m sub-contract has been assigned to Eurasia's 80pc subsidiary, and Monchetundra owner, TGK, for engineering and pit development works ahead of mining. Critically, the Sinosteel deal means that Eurasia can finance its obligations at Monchetundra without equity dilution.
Having secured its deal with Sinosteel, Eurasia took another significant step forward at Monchetundra in November last year when it received a mining permit for the site. This was fully approved and authorised by Rosnedra- the Russian federal agency responsible for mining.
In a project update released in August, Eurasia revealed that it has been completing several workstreams at the project since receiving the permit. Indeed, the business said it is currently completing production preparation activities and has secured a route to improving its metallurgical process and profitability. Critically, Eurasia also noted that it had completed a detailed project design report for Monchetundra alongside its long-standing working partner Central Kola Expedition. This comprises details such as open-pit design, a comprehensive land works of the asset's two open-pit sites, and proposals for mining locations.
Schaffalitzky tells us that completing much of this work is a necessary prerequisite to beginning the EPC contract and meeting the requirements of Russia's mining authority. He adds that the company plans to ramp up activity at the asset over the next six to 12 months, supported by West Kytlim mine revenue and the proceeds of a £500,000 placing carried out in April:
'This year, we are doing site preparation activities like land surveys to initiate the EPC. We are also fulfilling reporting requirements as required by Rosnedra. Central Kola Expedition are putting a detailed project design report together, for submission to authorities. Passing all of these milestones will really kick off the next phase of the project, moving us into a position where we can begin to build up the plant, begin mining, and then enter full production.'
Expanding Monchetundra ‘severalfold’
August’s update also saw Eurasia announce that it had finalised its application for the 'flanks area' surrounding Monchetundra . Under Russian law, companies that have been granted a mining licence hold the right to apply for further ground adjacent to an identified deposit and within 5km of an approved reserve.
In the case of Monchetundra, Eurasia believes that this area could increase project resources 'severalfold', at a very minimum covering extensions of identified ore bodies where mining can eventually continue. What's more, the business said several deposits are adjacent to Monchetundra's deposits. It is currently reviewing these in detail. Schaffalitzky elaborates:
'There is a 5km boundary around the entire mining licence where we can apply for further ground. At Monchtundra there are two distinct deposits, and the 5km perimeter extends from both of these deposits, so what we are doing now is applying for an exploration licence directly adjacent to our current mining licence. We expect the deposit to be expanded by a certain amount because it is obvious that there is an on-strike continuation of mineralisation at both deposits into this unlicensed ground. We were previously limited in our exploration works by the boundaries of our assigned exploration license -this application could be a very effective way of extending Monchetundra's lifespan severalfold. Notable occurrences are in an area known as the Nittis-Kamuzhya-Travyanaya massif,- we intend to update on this as and when the application is submitted to authorities.
Seeking out deals
In its latest development Eurasia has added to its management team’s M&A experience by hiring Alexei Churakov as a strategic advisor to its board. Churakov is a former Goldman Sachs and Morgan Stanley senior investment banker specialised in the mining sector and has facilitated many cross-border M&A transactions from Moscow, London, and New York.
Churakov has already assisted Eurasia in structuring its EPC contract with Sinosteel, and supported the creation and progress of its phased production increase strategy at West Kytlim.
More recently, he has helped to arrange detailed due diligence and multi-day visits to both Monchetundra and West Kytlim for James Nieuwenhuys, chief executive and director of Lesego Platinum. Lesego is a South African PGM company developing a c 50MMoz project in the eastern limb of the Bushveld Complex.
During these visits, Lesogo has studied and evaluated infrastructure availability and logistics access, drill core samples, results of laboratory test works along with other information and raw data at both of Eurasia’ assets. These efforts will inform Lesogo’s consideration of a partial acquisition of Eurasia's subsidiaries and joint venture opportunities at both sites, among other options.
Poised for growth
With West Kytlim already generating significant revenues and expansion efforts in place, Eurasia is already a much more advanced and de-risked prospect than many of its junior market peers. Alongside this, the company has previously stated its belief that taking Monchetundra into operation will take it 'into a different league of PGM producers'.
August’s update showed that the company is well on its way to achieving this goal, with plenty of milestones waiting to be crossed over the coming months. Complementing this progress is a palladium market that is enjoying a healthy supply/demand dynamic at the hands of anticipated electric vehicle demand and a greater focus on reducing emissions. As a low-cost producer in this market, Eurasia could be well set to enjoy a considerable rise from its currently depressed 0.50p share price over the coming months and years.
Author: Daniel Flynn
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