Before we delve deeper into the company, it’s worth dwelling on their activities, particularly those involving the Platinum and Palladium elements (two of the six metallic elements which go to make up the PGMs or Platinum Group Metals). Whilst most investors are quite commonly aware of gold and silver, the PGM’s are perhaps less well understood.
References to Platinum are usually seen in the context of its industrial usage, predominantly in the motor industry (Platinum being a key component in the manufacture of catalytic converters), whilst when compared to Gold and Silver, its standing as a precious metal remains somewhat understated.
There are some practical reasons for this; notably the absence until recently of a Platinum ETF (Exchange Traded Fund), and of course ETFs for Gold and Silver have enjoyed spectacular popularity in recent years. Non-the-less demand for Platinum remains buoyant and we have to remember that Platinum is extremely rare, representing just 0.005 parts per million (ppm) in the earth’s crust (and in case you were wondering gold is 0.004 ppm and silver 0.075 ppm).
Palladium is a similar story; over 50% of its demand comes from the automotive sector, and again is heavily utilised in catalytic converters; something of an alternative for Platinum, with the usage of each often depending on which offers the best price to market.
So what about Eurasia Mining, one of a limited number of Platinum/Palladium plays on the London market?
Value Proposition:
Eurasia Mining is in something of a hiatus at the moment. Investors with an interest in the stock have been critically focused on the company’s production licence application at their West Kytlim project, approval for which is still awaited. The criticality of this licence confirmation should be fully understood by investors as much of the investment case is built around this issue.
The licence application was submitted in 2009 and it has been something of a protracted wait as the Russian authorities seem to take their time with their administrative process, a problem that has affected other UK listed companies in a similar way.
However, we believe that such is the significance of these licences that once granted, the event in itself could prove to be somewhat of a game changer for the company.
How so? Well the deposit in situ at West Kytlim is of an alluvial nature and simply put, this means that the production timeline could be quite rapid, and as such could provide the company with significant cash inflow at low capital expenditure outlay, within just 6-9 months or so from licence confirmation (something we will expand on later in this article).
In the interim, despite having to wait for the granting of this production licence, the company has continued to explore and build on its portfolio, demonstrating the value of what they have discovered and making themselves even better prepared for operations once the licence confirmation arrives.
In fact some of the company’s recent exploration data has been superb, something which the market, transfixed on the production licence, has probably failed to pick up on.
So whilst we see the ultimate granting of the production licence as a major value generative event, we also believe there is an underlying value in the prospects, as articulated through exploration data, and as such should not be overlooked. But we will look more closely at asset development later.
But this type of scenario will always presents investors with options. It is likely that news of the granting of the production licence will be accompanied by an expeditious revaluation of the company. So investors choosing to wait for this event to happen will be likely to enter at a higher price than we see today, though with the additional security as a benefit.
The more speculative investor (or should we say less risk-averse!), perhaps heartened by the exploration news of late, has the opportunity to enter at the current suppressed share price and will benefit from the expected upside once the Production License has been confirmed.
But we would note that lengthy waits for licence approvals is not something specific to Eurasia. There appears to be something of a theme with the Russian authorities taking time to consider and grant production licences. However it is noted that Eurasia has secured exploration licence extensions in its key projects, providing evidence that the process is continuing.
So patience is a virtue, which if combined with a little investment bravery may well pay handsome dividends. Time will tell but we believe that the story, as they say, is worth telling!
Now on to the detail:
West Kytlim:
A bit of background regarding the structure: Urals Alluvial Platinum owns 75% of the West Kytlim project, with Eurasia owning 37.5% through their 50% holding and Anglo Platinum holding an equivalent 37.5% through the balancing 50%. The remaining 25% of West Kytlim is held by a local mining company Yuzhno Zaozersky Priisk. Anglo Platinum is 79.72% held by Anglo American plc and Eurasia is Anglo Platinum’s Russian Joint Venture partner as outlined in the stakeholder summary on the company website. Exploration at West Kytlim has been largely funded by Anglo Platinum to date.
As mentioned earlier, Eurasia applied for a production licence for West Kytlim in September 2009 and still waits for confirmation of this licence. This somewhat lengthy delay, although frustrating, is not unusual at the moment, with the Russian authorities taking their time to issue production licences. The company confirmed this in the final results released on 6th June 2011 noting the slow pace of the administrative system, whilst highlighting that indications are the licences will be granted, but with no clarity as to timescale.
In the meantime, there was some positive encouragement with the announcement on 29 October 2010 confirming the company’s West Kytlim exploration licence had once again been extended for a further two year term from December 2010.
Production Licence confirmation would be a game changer for the company because in relatively short order (possibly as little as 6-9months) the company would be able to commence mining and production operations. We believe this is something the market may be missing and it is worthwhile explaining why such a rapid ramp up to mining may be achievable.
The thing about West Kytlim is that it is an alluvial deposit and that is rather significant. The company explained the principles of alluvial deposits in their news announcement from 16 June 2010 but in essence when production commences, Eurasia will be using a “dry mining” approach whereby the platinum bearing sediment, located in steep sided valleys near to active river channels or older river beds and terraces, is bulldozed towards a washing plant. Sorting occurs and the finer sediments are washed to secure the heavier mineral proportion. This “black sand” concentrate is bagged and further concentrated to produce a platinum rich product, sold directly to one of three available refineries.
As is clear, capital costs for earth moving equipment and a washing plant are low and the process will not require a significant period of time to establish. This is why production can commence so quickly after the licence is granted. Unlike many precious metal mining operations alluvial platinum, in the right circumstances, can be a very rapid generator of incoming cash flow.
There are of course potential downsides that need to be considered, because alongside the issue of licence delays, the nature of alluvial platinum is such that exploration is never quite the definitive exercise as with non-alluvial exploration and the delivery of a clearly defined JORC resource. Again we would refer readers to the news announcement from 16 June 2010 where the company explains in detail the exploration process and its challenges.
Alluvial deposits means the metal is not evenly dispersed throughout host rock or sediment, but can be concentrated in clumps. As a result the location of the mineralisation is highly variable due to irregular distribution and size of the platinum grains; something known as the “Nugget Effect”. Two samples from the same location can thus give very different assay results, and this makes the calculation of a specific mineral resource extremely difficult.
The company has undertaken reconnaissance drilling and sampling to provide some data, but beyond that, the conduct of a thorough detailed drill campaign would be subject more to luck than judgement in terms of resource quantification. There is instead a very sensible common sense attitude that prevails.
Within this area, in similar territory in the Urals, work on alluvial deposits has continued with platinum being produced continuously since 1824 within the Kytlim river complex. This is where Eurasia’s licences are situated and this area has produced some 50 tonnes of platinum over time. For lovers of close-ology and history, there is very strong evidence of mineable deposits even though the company cannot produce detailed drill data leading to a precise resource due to the “Nugget Effect”.
That said, Eurasia has conducted work at the West Kytlim licence areas across the Tylai-Kosvinsky Placer (a placer being the source of the platinum bearing river sediments) on which the work led to the creation of a Russian Standard C2 Reserve. This Reserve, although relatively small, was essential to establish enabling official recognition and certification of a new discovery in March 2009; a vital step in the process of securing a production licence. In addition the company has identified a further eight target areas on which work has been undertaken.
The size of the company’s licence area is substantial, amounting to some 171 square kilometres. As such the likelihood and potential magnitude of platinum resource is significant, hence the understandable excitement and desire to push ahead with the production phase. In the meantime the company is continuing to advance its knowledge of the area and add new areas of alluvial platinum resource through a combination of drilling, pitting and trenching.
Kola Peninsula:
On the Kola Peninsula Eurasia holds a 60% interest in two projects exploring for Platinum Group Metals namely Monchetundra and Volchetundra, with the balancing 40% owned by Anglo Platinum outright, after expending $10million on exploration from 2006 to 2009. Of late the focus of exploration has been Monchetundra, with particularly positive grades being identified in the most recent results.
If we step back to the exploration update on 7 April 2010, the company provides a good interim summary of the exploration campaign to that date which had seen Anglo Platinum expend the agreed $10million to earn into 40% of the Kola project licences, leaving Eurasia with 60%. At that time a total of 16,121 metres of drilling had been undertaken at Monchetundra and 12,192 metres at Volchetundra. Both projects demonstrated PGM mineralisation but the most interesting results were at Monchetundra leading to that project becoming the focus of operations thereafter.
As with West Kytlim, Eurasia secured a two year extension to the Monchetundra exploration licence as confirmed in the 15 December 2010 news announcement, along with an exploration update confirming the intersection of high grades from a follow up 1,316 metres of diamond drilling for nine holes in total, seven of which confirmed the mineralised zone and provided grades up to 10.28g/t Palladium in the West Nittis contact zone. In addition the drilling led to the discovery of a new hanging wall (rock on the upper side of a vein or ore deposit) zone of mineralisation in an intersection with 2.66 g/t platinum and 8.2g/t palladium. The identification of high grade PGM mineralisation was of course a major boost to the exploration programme and led to additional drilling later in 2010/2011.
And that additional drilling, announced on 29 March 2011 proved to be very significant, in terms of the discovery of further high grade PGM mineralisation, confirming the discovery of copper-PGM hanging wall mineralisation in the Monchetundra licence area. The grade identified extended to a bonanza 145.39g/t Palladium equivalent and that, together with the balancing data, considerably increased the potential resources of the Monchetundra project.
After 2009, when Anglo Platinum completed its spend requirement of US$10million, Eurasia confirmed they were looking for other partners, presumably to ensure continuing exploration in the Kola Peninsula whilst defraying cost. Of course seeking partners just after the last 2008/2009 financial implosion of the markets was never going to be easy. But instead of standing still, the company pushed forward with its own resources and has now turned the Monchetundra project in particular into a highly exciting opportunity. With the exploration data set now held it is unlikely that the company will have as much difficulty to secure partners going forward, particularly as they are currently developing mine plans with a view to applying for a production licence on the project during the current exploration licence term.
Other projects:
In the spirit of keeping going and developing the business Eurasia also announced on 17 January 2011 a Memorandum of Understanding to acquire a 55% interest in an advanced Uranium project in Kyrgystan. The Kamushanovsky project has been the subject of a five year exploration programme and is estimated to contain at least 1,775 tonnes of Uranium Oxide (3.9 million pounds). A bankable feasibility for the project is underway with a view to completion by the end of calendar year 2011. The company taking the holding in Kamushanovsky is Energy Resources Asia Limited (ERA), of which Eurasia has a 50% holding. But to effect the Memorandum ERA need to raise $2.2million, a process that is underway, but taking some time to complete.
And finally on the project front, as confirmed in the Final Results released 6 June 2011, Eurasia is assessing a number of additional projects and is hoping to secure gold licences applied for in Far Eastern Russia, during 2011.
Conclusion:
The Eurasia business is ready to flourish, but it has been stymied by the length of time taken to secure the production licence for West Kytlim. Investors know this and, we believe, many are watching closely. On the grant of the production licence, Eurasia can rapidly pursue production in the short term and at low capital investment cost. The production will generate cash flow and that can be reinvested to help support the exciting developments at Monchetundra and to enable Eurasia to follow a variety of new projects to expand the diversity and deepen the strength of operations.
For Eurasia the granting of the production licence would be a major company changing event. For investors, it’s a question of whether to invest now, at current prices with the commensurate “licence risk” and considerable potential upside, or later, waiting for licence confirmation, and more visibility, but probably at a much higher entry price.
Copyright © MiningMaven 2010
Disclosure: The Authors hold shares in Eurasia Mining
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