Eurasia is finally coming of age with production ramping up at its operating West Kytlim platinum, palladium, iridium, rhodium and gold mine and the Monchetundra polymetallic PGM project on the cusp of development.
West Kytlim achieved industrial-scale production in May and is set to increase production sevenfold by the 2019 and 2020 seasons. At Monchetundra, a low-cost palladium-rich deposit, the last remaining hurdle is the final approval of the mine permit by the Prime Minister.
The project is fully-funded with a binding $176m EPC contract with Sinosteel. Eurasia sees maiden production in 2020.
West Kytlim stepping up. After mine start-up in 2016, the 68%-owned seasonal alluvial platinum and gold mine appears to have bedded down and is producing at a commercial scale. The increased productivity of the new mining contractor has already made an impact and production year to date is approaching 150kg of raw platinum (4,822oz), running 50% ahead of 2018’s 100kg target, with two months of the processing season left.
Ramping up. Mining at West Kytlim is transitioning to the larger and higher-grade Kluchiki open pit where the real benefit will be felt in 2019. Eurasia plans to ramp up production to 745kg (c.24koz) of platinum over the coming seasons. Eurasia will continue to retain 35% of gross revenue with all operating and capital costs, and mining risk borne by the contractor i.e. Eurasia’s profit before tax margin is fixed to 35%.
A company-making asset. Monchetundra (80%-owned) has state-approved reserves of 59t (1.9Moz) of palladium equivalent (2PGM+Au) in addition to significant copper and nickel credits. It will be a simple open pit, low-cost operation with standard beneficiation technology to produce a PGE and base-metal concentrate. Eurasia anticipates annual production ramping up to approximately 140koz of Pt Eq.
The project is located in a mining region with excellent infrastructure, being only 3km from Norilsk’s Severonickel refinery and close to existing rail and power networks. Thus, our analysis indicates very low capital intensity compared to typical greenfield PGM developments. Low operating costs should create to a high-margin producer even at much lower basket prices.
Monchetundra’s final hurdle. Permitting is virtually complete with Eurasia awaiting only the final mine permit sign-off from the office of the Prime Minister. The timing is not known but Eurasia expects final sign-off imminently. For reference, the final sign-off at West Kytlim took a matter of weeks. If the mine permit is received before the end of 2018, the EPC contract will commence in 2019 and Eurasia anticipates mining start-up in mid-2020 and production by the end of that year.
Fully-funded. The construction of Monchetundra is fully funded via a binding $176m Engineering Procurement, Construction and Commissioning contract with Sinosteel, a Chinese state-owned enterprise and one of the world’s leading EPC contractors. 85% of the contract value has been arranged as debt on competitive terms, with a $50m subcontract to cover preparatory engineering works and the remaining 15% equity contribution.
Palladium leverage. Given the typical prill splits in the PGM industry, Monchetundra offers exposure to palladium seldom seen in the sector. The deposit is palladium-rich with a Pd to Pt ratio of 2:1 based on grade, making it one of only a handful of new palladium-dominant development projects globally. The Pd:Pt ratio is even higher at 3.0 based on forecast annual production in ounces. For contrast, annual production for the major PGM producers in the industry averages out as a mere 0.6 Pd:Pt. Monchetundra offers a lower risk profile than the majority of deep underground mines in South Africa and we believe the perception of Russian risk has been overcooked. We believe that Monchetundra will increasingly appear
on the radar of major mining companies looking for quality tier 1 assets.
2.8p valuation. We initiate coverage on Eurasia with a 2.8p target price derived from DCF models of both operations, adjusted by a risk multiple. Our base-case NPV12% for Monchetundra is $188m and our NPV10% for West Kytlim is $55m on a 100% basis and using conservative spot pricing.
We risk-adjust our NAV at 0.5x for Monchetundra and 0.75x for West Kytlim. Our 2.8p target (fully diluted) implies that Eurasia is trading at a 0.14x discount to NAV, offering considerable re-rating potential if the company successfully
executes its production build-out and development plan.
Eurasia is now a bona fide platinum producer and must press ahead with the production ramp-up at West Kytlim. The real prize for investors is the development of Monchetundra with final permitting down to the short strokes. The EPC contract materially de-risks project development and will put Eurasia in play as a rare palladium-dominant producer.
Although there is considerable ramp-up and develop milestones ahead, the current market cap is unchallenging and represents an attractive entry point to a stock that is emerging from the doldrums.
Optiva Securities broker
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