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Find CIBC research on Bloomberg, Reuters, firstcall.com
and ResearchCentral.cibcwm.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) 594-7000
INSTITUTIONAL EQUITY RESEARCH Leon Esterhuizen 44 (207) 234-6139 [email protected]
Arnold Van Graan 27 (11) 575-4935 [email protected]
Ben McEwen 44 (207) 234-6180 [email protected]
I N I T I A T I N G C O V E R A G E j
Euromax Resources
Initiation: Timing Is Everything
All figures in US dollars, unless otherwise stated.(C$1.3:US$1) 15-136716 © 2015
CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential
conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report,
where applicable.
August 13, 2015
Precious Metals
Stock Rating: S E C T O R O U T P E R F O R M E R –
S P E C U L A T I V E
Sector Weighting: M A R K E T W E I G H T
Key Ratios and Statistics
12-18 mo. Price Target C$0.70
EOX-V (8/12/15) C$0.36
Key Indices: None
3-5-Yr. EPS Gr. Rate (E) NM 52-week Range C$0.17-C$0.57
Shares Outstanding 116.8M
Float 116.8M Shrs
Avg. Daily Trading Vol. NM
Market Capitalization C$42.0M
Dividend/Div Yield Nil / Nil
Fiscal Year Ends December
Net Asset Value $0.58 per Shr
2015 ROE (E) NM
LT Debt $15.0M
Net Asset Value Common Equity NM
EPS 2013 2014 2015 2016
Current ($0.10A) ($0.13A) ($0.09E) ($0.07E)
Estimates (Dec. 31) 2013 2014 2015 2016 CF per Share-Curr ($0.06A) ($0.10A) ($0.09E) ($0.05E) Valuation (Dec. 31) P/E-Curr NM NM NM NM P/CF-Curr NM NM NM NM
Company Description Euromax holds the copper-gold Ilovica project located in Macedonia.
www.euromaxresources.com/
What's Changed
The mining scene is awash with stories of investment at the top of the cycle, delivering deeply negative returns and, in many instances, dead losses as assets are shut in the now much lower pricing
environment. The only way to make real returns in the commodity space is to be counter-cyclical. Buy and develop in low metals price environments so that the higher prices will eventually see significant returns delivered to the long-term investors who positioned early.
So here is Euromax with its Ilovica copper/gold project. With an IRR in the order of 8% at current spot metals prices, a market cap of $40 million and some $500 million in capital needed to build the
mine... Run for the hills?
Implications
NO - this is, in our view, exactly the kind of development that must
be supported: Low cost ($800/oz. gold equivalent AISC), long life (over 20 years), well-funded (some $400 million in funding already secured through streaming and project finance debt that is guaranteed by the German government) and easy mining and
processing (0.7:1 strip right next to all infrastructure).
This project at the top of the cycle (gold at $1,900/oz. and copper at
$4.40/lb.) would have delivered an IRR in excess of 35% and would obviously have been built. Here now, these numbers indicate "potential," while the actual IRR of 8% proves it still viable - perfect
for positioning and building for real solid returns when the market eventually turns up from here again. Furthermore, the stated strategy to pay out all free cash flows from this mine as dividends certainly adds more sparkle to the already good optionality.
Valuation
Euromax has a solid project in Ilovica, has secured most of the funding and is building when most are closing down - the perfect
mix, in our view, for proper long-term returns. One could decide to wait for an opportunity closer to the realisation of production, but that may also mean foregoing the possible premium that could be
unlocked in a takeout scenario. As of August 13, we initiate with a Sector Outperformer (Speculative) rating and a price target of C$0.70/share (including a $100 million equity raise in 2016 at
C$0.40/share).
Initiation: Timing Is Everything - August 13, 2015
2
Source: Company reports and CIBC World Markets Inc.
Euromax Resources Sector Outperformer - SpeculativeTSX-EOX 13-Aug-15 C$ 0.36 ###### Leon Esterhuizen, (+44 207 234 6139) [email protected]
12- To 18- Month Price Target: C$ 0.70 Arnold van Graan, (+27 11 575 4935) [email protected]
Precious Metals Ben McEwen, (+44 207 234 6180) [email protected]
Sector Weighting: Market Weight
All figures in C$ million, unless otherwise stated.
Risk adjusted discount rate of 10% used across the asset base.
Multiples EV/NAV* EV/NAV^ 2014 PCF 2015PCF
Euromax Resources 0.1x 0.2x n.m. n.m.
European & African Average 0.7x 1.3x 2.7x 1.9x
Large Cap Average (>$10B) 1.3x 2.4x 7.6x 10.0x
Mid Cap Average ($2B-$10B) 1.3x 2.5x 13.8x 13.9x
Small Cap Average (<$2B) 0.6x 1.3x 5.6x 5.2x
* Using: $1500/oz And 5% ^ Using: $1500/oz @ Risk Adjusted Discount Rates
P/NAV Sensitivity $1,200 $1,400 $1,600 $1,800
Euromax Resources 0.1x 0.1x 0.0x 0.0x
European & African Average 1.2x 0.7x 0.5x 0.4x
Large Cap Average (>$10B) 1.3x 0.9x 0.7x 0.6x
Mid Cap Average ($2B-$10B) 1.3x 1.0x 0.8x 0.7x
Small Cap Average (<$2B) 0.6x 0.4x 0.3x 0.2x
Key Financial Metrics EV ($mln) EV/Prod+ EV/2P* EV/R&R^ Production Profile
Euromax Resources $373 $2,652 $78 $55
European & African Average $2,323 $14 $71
Large Cap Average (>$10B) $4,989 $275 $172
Mid Cap Average ($2B-$10B) $3,554 $173 $110
Small Cap Average (<$2B) $1,659 $136 $54
+ 2014A Production * Current Proven & Probable Reserves ^ Current Reserves and Resources
Income Statement 2013A 2014A 2015E 2016E
Gold Price Assumption 1,412 1,266 1,200 1,250
Copper Price Assumption 3.33 3.11 2.79 3.00
Silver Price Assumption 23.9 19.1 17.0 17.0
Gold Production (000s oz) n.a. n.a. n.a. n.a.
Total Cash Cost/oz (co-p) n.a. n.a. n.a. n.a.
Total Cash Cost/oz (by-p) n.a. n.a. n.a. n.a.
Capital Expenditure -5 -2 0 -225 Production ( 2015E )/ Modeled Resource Detail
All-in Cost/oz n.a. n.a. n.a. n.a. Asset Production* Cash Costs^ 2P M & I
Revenues 0 3 0 0 Ilov ica 0 0 4.5 5.3
Expenses KMC 0 0 0.0 0.0
Operating Expenditures 0 2 0 0 Total 0 0 4.5 5.3
D,D&A 0 0 0 0
S,G&A 6 7 10 10
Exploration 0 0 5 5
Other Expenses 2 4 0 12
Total Expenses 8 14 16 27
Operating Income -8 -11 -16 -27
Income/Mining Tax 0 0 -5 -8
Minority Interest 0 0 0 0
Net Income -8 -11 -11 -19
EPS -0.10 -0.13 -0.09 -0.07
CFPS -0.06 -0.10 -0.09 -0.05
DPS 0.00 0.00 0.00 0.00 * Gold (000s oz) 2P: Proven & Probable Reserves (000s oz)
Shares Outstanding 83 85 117 288 ^ Net of by product credits (if applicable) M & I: Measured and Indicated Resources (000s oz)
Cash Flow Summary 2013A 2014A 2015E 2016E NAV Breakdown Using Gold Price of: $1,200
Cash flows from operations -5 -3 -13 -15 Fully diluted shares in issue 331
Investment activ ities -4 1 0 -225 Ownership Discount Rate US$ Millions Per Share
Financing activ ities 8 2 23 440 Ilov ica 100% 10% 158 0.48
Increase/ (Decrease) in cash -1 0 10 200 KMC 100% 10% 0 0.00
Balance Sheet 2013A 2014A 2015E 2016E
Cash & Equivalents 1.4 2.0 11.9 212.4 158 0.48
Total Assets 24.3 19.8 28.5 453.8
Short Term Debt 0.0 2.5 2.5 2.5 Liabilities -18 -0.05
Long Term Debt 0.0 0.0 15.0 375.0 Cash and Short-term Investments 12 0.04
Total Liabilities 1.2 5.8 17.5 382.0 Working Capital -3 -0.01
Shareholder Equity 23.1 14.0 11.0 71.8 G&A & Equity Raisings 43 0.13
Total Equity and Liabilites 24.3 19.8 28.5 453.8 Total Net Asset Value 194 0.58
Asset Locations
The Ilov ica Project is situated in Macedonia in a near-perfect setting that effectively "shields" the mine from v iew
and yet, places it right next to all the needed infrastructure of road, power, water and rail. The concentrate delivery to
the Pirdop Smelter in Serbia (owned by a German company) within days of being loaded on a train less than 50km
from the mine greatly assists in securing the low cost dynamics of the project but is also key in the funding
arangement with the German Government prov iding gurantees for some 40% of the total capital funding needed to
build the mine. At spot gold and copper prices around $1100/oz. and $2.40/lb. the project returns are low single
digits but given the AISC on a gold equivalent basis of some $800/oz., this project features in the bottom half of the
global gold and copper cost curves (AISC on a copper equivalent basis coming in at about $1.75/lb.). Building
mines at the bottom of the cycle, when metal prices are low, prov ides for the best possible opportunity to make
proper investment returns over the longer-term (many projects sporting high double digit IRR's when metal prices
were high are now closing down). Euromax offers a good option for significant future returns.
Investment Thesis
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2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
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Gold Production (Koz) Copper Production (Mlb) Cash Cost Net Of By-products (US$/oz)
Initiation: Timing Is Everything - August 13, 2015
3
Investment Rationale And Recommendation
Solid IRR, Cash Flows – Proper Opportunity? Euromax’s (EOX–SO-Spec.) 100%-owned Ilovica Project is located in the
southeast of Macedonia (The Former Yugoslav Republic Of Macedonia) and is
forecast to produce 90 Koz. of gold and 16 Kt of copper per annum over an
initial life of mine of some 23 years. The project was initiated a couple of years
ago and, according to the project’s preliminary feasibility study (PFS) (using
$3.00/lb. copper and $1,250/oz. gold prices), it delivers a 19% internal rate of
return (IRR) pre-tax, and 16% IRR post-tax. This equates to a six-year pre-tax
payback or seven years post-tax payback on the $502 million initial capital
requirement.
Of course, the metals prices have fallen subsequently, leaving the pre-tax IRR at
approximately 8% (using $2.40/lb. copper and $1,080/oz. gold). Clearly then,
this is no “dripping roast” at current metals prices, but here’s the rub – if the
view is for a much better copper price in the near term (most market forecasts
point to the development of big copper deficits within the next year or two),
should this opportunity – to build a relatively low-cost mine that still shows
positive returns (albeit very low returns at current spot prices) – still be pursued
at this stage? In particular, given a three-year build (from here, with the actual
mine build some 18 months) that may put the mine into production at much
better copper (and gold?) pricing levels, is this not the ideal time to build?
The answer will, in our opinion, depend very much on an investor’s view on the
potential for higher copper and gold prices in the future, and on the funding
structure. The less the company is dependent on equity and the more it can
secure debt for funding, the better the chances of success. As we will show later,
Euromax already sports a significant amount of the capital needed, with only
some 20% of the remaining funding likely to come from equity.
Based on our calculations and forecasts, the project will produce 165 Koz. of
gold equivalent output per annum at AISC (all-in sustaining costs) of $800/oz.
on a gold-equivalent basis or just under $1.75/lb. on a copper-equivalent basis.
As such, and including an equity raising of $100 million in 2016 at an assumed
share price of C$0.40/share, we believe that the net asset value (NAV) (at 10%)
of C$194 million or C$0.70/share represents a well-discounted (or risked) value,
indicating a real possibility of a successful investment opportunity.
$500 Million Capex…? No Worries, Nearly Fully Funded The PFS capital expenditure forecast for Ilovica is some $502 million, clearly a
material number (including about $50 million for contingencies) given Euromax’s
current market capitalisation of some $40 million – the very typical problem of
any start-up company in the mining industry. So, does this imply material per
share dilution as the company is pushed towards raising equity finance to fund
this capital bill? Or, more bluntly, should we wait for others to fund the capital
and only look to come in later after this risk has been handled?
Well, a “massive” dilution event is unlikely, in our opinion, given the company’s
continued progress on alternative funding. In October 2014, the company
announced that it had agreed terms with Royal Gold (RGLD–SO) for a gold
stream worth $175 million, equivalent to 32% of the total PFS capex bill (at the
cost of 14% of its gold-equivalent output). Furthermore, in May 2015, Euromax
announced that it had entered into a debt financing agreement with a number of
Initiation: Timing Is Everything - August 13, 2015
4
European banks for $215 million (and backed by German government UFK
Eligibility – whereby the German government will guarantee funds in line with
the value of the metal that will be supplied to the German Smelter/Refiner for
processing). Concurrent with that announcement, the company also noted that it
had entered into an equipment financing facility for up to $25 million, bringing
the potential funding receipt to some $400 million, equivalent to 80% of the
total capex bill to build this mine.
This in itself is an astonishing achievement and speaks volumes about the
experience and acumen of the Euromax management team. Even more so given
that project numbers generally improve into the Feasibility Study (from the
wider margin of error associated with the pre-feasibility study). At the same
time we have seen clear declines in cost curves across the gold and copper
industries, the oil price is lower and there are likely to be some adjustments to
render the capital profile more efficient. The level of financing already secured
then, even on this pre-feasibility level, stands out as a very clear and noticeable
flag as to the quality of this project.
So, with regards to the remaining $100 million capital shortfall, management
will be seeking equity participation for the debt arrangements mentioned above,
at set debt/equity ratios. In other words, there will be an equity component to
this funding and its size is essentially “fixed” by the requirements of the debt
providers (and the total forecast capital expenditure budget, of course) –
pointing to all of the outstanding capital likely coming from equity. In our
modeling, we have included a $100 million equity issue at a share price of
C$0.40/share (currently trading at about C$0.36/share and likely higher
following the expected release of what will probably be a better feasibility
study). In other words, the equity issue price could well be much better than our
assumed C$0.40/share.
Stacking it up then: At a cost of some $800/oz. on a gold-equivalent basis (or
some $550/oz. on a by-product basis whereby all copper income is deducted as
a credit against the gold cost), the project sports very competitive AISC in both
the gold and copper sectors ($1.75/lb. AISC on a copper-equivalent basis); it
seems to already be very well funded off just the PFS numbers; and, it does not
present anything difficult in terms of mining and/or processing as all major
infrastructure needs are in the immediate vicinity. Outside of this, the financial
analysis points to value – maybe not a lot at current metals prices, but we
certainly believe that if the IRR is positive at this time, at what most consider to
be the bottom of the copper cycle, then the project will more than likely deliver
very good returns over many years in the future.
By our calculation, the average AISC for the global gold industry at the end of
H2/2015 is just under $1,100/oz. with the tail of that cost curve becoming VERY
flat between $900/oz. and $1,000/oz. – less than 25% of global gold production
will be making profits at a gold price below $900/oz. on our forecasts (most of
the “quality” senior producers are all guiding for AISC levels in the order of
$850/oz. to $900/oz. with most of the other major players squarely pegged
around the $1,000/oz. level).
This competitiveness of the Ilovica ore body is also reflected in our cash flow
analysis. Exhibit 1 shows the numbers at the current spot metals prices of
$1,080/oz. for gold and $2.40/lb. for copper. Given the sharp decline across the
metals spectrum over the past month, the CIBC forecast scenario (long-term
gold at $1,200/oz. and copper at $2.75/lb.) now seems a bit rich, but with
Euromax showing the capacity to generate free cash at today’s very low spot
prices (gold at $1,080/oz. and copper at $2.40/lb.), any higher price scenario
naturally would make the numbers significantly better.
Initiation: Timing Is Everything - August 13, 2015
5
Exhibit 1. Spot ($2.40/lb. Copper And $1,080/oz. Gold) Cash Flow Excluding An Equity Issue (LEFT) And Including A $100 Million Equity Issue (RIGHT)
Source: Company reports and CIBC World Markets Inc.
Exhibit 2 demonstrates the $100 million equity issue being sufficient to see the
project through to full production and making a little bit of money, leading to a
drop in the debt burden. The current proposed debt deal requires no payback in
the first three years (interest only), but then amortizes over the remaining
nine years (a 12-year debt deal secured by a 10-year smelter offtake agreement
and the German government providing a guarantee for these funds over
12 years). We believe it highly likely that the debt would be re-financed once
strong cash flows are generated.
In terms of metals price sensitivity, once the $100 million equity portion is
funded, the company would be running very close to break-even, with just a
further 10% drop in prices pushing the company back into small losses.
However, a 20% increase in metals prices would see Euromax repaying the full
$100 million of equity finance within two years and at a 10% improvement in
the metals prices in just three years of the 23-year life of mine (Exhibit 2).
Exhibit 2. Spot ($2.40/lb. Copper And $1,080/oz. Gold) Cumulative Cash Balance With No Equity Issue (LEFT)
And With A $100 Million Equity Issue (RIGHT)
Source: Company reports and CIBC World Markets Inc.
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-30% -20% -10% Spot +10% +20% +30%
Initiation: Timing Is Everything - August 13, 2015
6
This gearing to metals prices is very good and given the roughly 50/50 revenue
contribution split between gold and copper at current metals prices, Euromax
would be equally geared to rallies in gold and in copper. At a discount rate of
between 5% and 10% (given the 80% secured funding and the relatively low
position on the global cost curve, the lower discount should be more applicable),
we estimate the value at between about $0.05/share and $0.60/share
(C$0.07/share to C$0.80/share). Our operating NAV estimate at the current spot
metals prices comes in at about C$0.63/share, dropping to C$0.10/share at the
more aggressive 10% discount rate and after accounting for overheads, in line
with our project IRR estimate of about 8% at the operating level.
From Exhibit 3, given a current share price of C$0.36/share, and assuming a
10% discount rate, metals prices would need to increase by some 15% to justify
the current value. At a discount rate of 5%, of course, a 15% jump in metals
prices could increase the value to more than three times the current share price
(bear in mind that our values already include dilution assumed in an equity issue
of $100 million).
Exhibit 3. NAV Sensitivity At 5% (LEFT) And 10% (RIGHT) – Almost Equally Driven By Copper And By Gold BUT Challenging At Current Prices…
Source: Company reports and CIBC World Markets Inc.
Of course, many would look at the low to no NAV and the IRR of only 8% and
simply decide to walk away from this project at current metals prices. We would
add though that had this project come to market three or four years ago with an
IRR pushing above 30% the decision may well have been to invest, only to then
lose one’s shirt as the metals prices tumbled. Basically then, buying at the
bottom of the cycle implies some level of willingness to weigh a low NAV against
a much better option value. In our view, if a project such as Ilovica can show
positive free cash flows at these prices, it not only deserves a low discount rate
but certainly should be attracting attention as a good opportunity to secure
longer-term returns that are likely to be much higher over the current 23-year
life of mine.
The peak funding requirement seems set at about $100 million but could
increase if metals prices were to decline even further, driving the initial cash
flows lower. Exhibit 4 illustrates this position and makes it clear that current
spot pricing levels are really starting to push the fundamentals of this ore body.
It must be added that our numbers remain conservative while the feasibility
study that is due out at the end of October 2015 is highly likely to reflect better
capital and cost numbers.
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Initiation: Timing Is Everything - August 13, 2015
7
Exhibit 4. Peak Funding – About $100 Million, Almost Regardless Of
Metals Prices, But Could Be 50% More If There Are Even Lower Metals Prices Over The Next Two To Three Years
Source: Company reports and CIBC World Markets Inc.
From a potential investment perspective, the standard question relates to buying
before the equity issue or waiting until the company is fully funded before
buying the stock. There is no doubt that the risk to investing after the equity
issue is significantly lower than what it is beforehand. However, bear in mind
here that some 80% of project funding is essentially already in place – the
equity investors will be bringing in only 20% of the required funding, to then
share in 100% of the upside. In a sense then, any investor buying in before the
equity issue is already buying into a reduced risk scenario.
Of course, once fully funded, the risk reduces markedly and the stock should
trade higher (dependent on metals prices and a smooth mine build, of course).
Waiting to invest after the equity issue will, thus, likely imply paying a lot more
for the share (as always, risk = reward). Naturally, buying before the equity
issue also covers the probability of another mining company considering the
very low value of Euromax versus the high quality of its project and deciding the
company may offer a good growth opportunity. In a sense then, the main risk
for investment before the equity issue boils down to the equity issue price.
In Exhibit 5, we illustrate the sensitivity to the NAV at 10% and at the CIBC
metals price forecast scenario ($1,200/oz. gold and $2.75/lb. copper). We model
an assumption of an issue price of C$0.40/share – implying an NAV of
C$0.70/share. Even if we dropped that issue price to just C$0.30/share, the NAV
would still be about C$0.60/share, compared to the current trading level of
C$0.36/share. We have to make the point that we’d be unsurprised (given very
little liquidity at present and given better Feasibility Study numbers expected in
October) if the equity issue next year transpired at a share price well above the
current C$0.36/share.
Initiation: Timing Is Everything - August 13, 2015
8
Exhibit 5. NAV/Share Sensitivity To Varying Equity Issue Prices
Source: Company reports and CIBC World Markets Inc.
Finally, it’s worth noting here the quite adamant position by the CEO and the
board that this asset will be built to then distribute ALL free cash flow to the
shareholders (with some cash buffer left in the company, of course). If there
comes a time for future growth or expansion capital, the same shareholder base
may be pushed for a rights issue but only if the capital requirement makes sense
in terms of adding value to the very investors who will be funding it and tapping
all the cash flow from it again.
We very much like this model of delivery as it not only significantly enhances the
optionality of the shares but adds a lot more credibility to delivering and
embarking on ONLY projects that are well scrutinized and approved (and then
funded) by the shareholders. Being underpinned by the first project that can
already sport a plus-20-year life is a very good position from which to build such
a longer-term real dividend vehicle – everything the market wants: low cost and
high optionality coupled to yield and growth. Perhaps the only remaining worry
would be fast-accumulating takeout bids! A problem worth having…
So, in our view, this investment scenario – getting in at the bottom of the cycle
with an “easy project” that is already very well-funded and showing a positive
IRR is really the ONLY way to secure proper longer-term investment returns
(much, much better than buying high IRRs at the top of the cycle!). The strategy
and goal to pay out all free cash flow simply underline that optionality. The
risk/reward balance in this situation is clearly very much tilted in favor of
reward. While there is no guarantee of success or even of high returns or
dividend yields, the way in which the project is set up, funded and run
maximizes that possible gain, which is all that any investor already bullish on
gold and/or copper can wish for. If the investor is a bear on either gold or
copper or both, this vehicle, in our opinion, would not be the preferred play at
this stage.
Let’s take a closer look at some of the other attributes that render this project
appealing enough to write this note and to recommend investment in Euromax.
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Initiation: Timing Is Everything - August 13, 2015
9
The Location Adds Up Macedonia is not the first location to spring to mind as a mining destination of
choice but, as Euromax is progressively showing, the country has the capacity to
further develop its (very) nascent mining industry. Indeed, Ilovica would
represent the first mining development by a foreign company in the country for
many years. Outside of the development of mining as a source of foreign direct
investment, Macedonia has made significant strides in liberalising and opening
up its economy. Relative to its Balkan and Southeast European peers, the
country ranks favourably on the ease of doing business, according to the World
Bank, and has the lowest tax rate in Europe at 10%.
Target On Its Back? Given the solid returns from a largely funded asset in an improving business
destination, we believe that Euromax represents a potential take-out target. We
believe that potential acquirers include Dundee Precious Metals (DPM–SP) or, in
fact, the same company that bought the previous assets assembled by this
management team, Eldorado Gold (EGO–SO).
Team Has The Track Record To Deliver The management team at Euromax has a strong track record of project delivery,
having come to the company from European Gold Fields following its acquisition
by Eldorado Gold. We believe that this team will continue to progress the project
towards commissioning with minimal issues, as it has demonstrated thus far.
Share Price Performance Exhibit 6 illustrates Euromax’s performance over the last 12 months. What
seems to be a relatively sideways-moving stock hides some wild swings in the
share price, having dropped as much as 60% and then climbed back to some
5% above the starting point before now trading at about 20% lower than the
starting point a year ago.
Be warned, this is junior-developer territory and it is not for investors with low
risk tolerance. It must be noted that there really aren’t many developers
building new copper projects at this juncture – a clear sign of value in itself, in
our opinion.
Exhibit 6. 12-month Share Price Performance, Indexed (Left) And Actual (Right)
Share price performance cannot and should not be viewed as an indicator of future performance.
Source: Bloomberg and CIBC World Markets Inc.
Initiation: Timing Is Everything - August 13, 2015
10
Key Catalysts We believe that there are a number of forthcoming catalysts for Euromax over
the next 12 to 24 months – all of which should be share price positive:
Reserve / Resource Update (September 2015);
Main Board Listing on TSX (September 2015);
Feasibility Study Completion (October 2015);
Final Offtake Term Sheet (October 2015);
Final Bank Funding Commitment (January 2016);
Receipt Of The Exploitation Permit (October 2016);
Mine Building Start (November 2016); and,
First Production (H2/2017).
The current cash position (about $10 million) is sufficient (given two $15 million
payments from the streaming agreement with Royal Gold to fund the feasibility
study) to take the mine plan through to the build decision. The anticipated
equity issue of $100 million will essentially mark the point at which all permitting
and funding is lined up for the build decision around mid-2016.
Valuation And Price Target Calculation As mentioned, our conservative analysis points to a reasonable chance of
success, in particular given the view that the copper price should be improving
in the future. In our evaluation, we also take account of a $100 million equity
issue, which we assume to be done at the current share price, while our costs
are slightly higher and the assumed build-out a little slower. We also believe
that the constant drift lower in the global cost curves, as well as slight tweaks to
the capital plan (which should deliver lower capex needs), should improve the
feasibility study numbers (when released before year-end 2015).
Being reasonably conservative, we derive a NAV at a 10% discount rate of some
$0.58/share or roughly C$0.70/share at the CIBC forecast metals price scenario.
Against this, using today’s very low spot metals prices, we see value to about
C$0.10/share (using a fairly aggressive 10% discount rate while at 5% that
value jumps to about C$0.75/share).
Mining is always about taking risk, and not least is having to take a view on
future gold and copper prices. However, if a mine can be built at these prices
(with gold and copper down close to 50% from their respective peaks in 2011)
and still make a case for some returns, then we believe it is set up perfectly for
when the cycle improves. Simply put, any low-cost mine should stand the test of
time through the cycle and the Ilovica Project seems to be squarely positioned
south of the mid-point on a copper and/or gold cost curve.
Given our conservative modeling approach, we opt to price the stock at a P/NAV
multiple of 1x, delivering a price target of C$0.70/share based on CIBC
estimates of long-term gold at $1,200/oz. and copper at $2.75/lb.
Initiation: Timing Is Everything - August 13, 2015
11
The Ilovica Project The 100%-owned Ilovica Project is located in the southeast of Macedonia,
approximately 15 kilometres to the west of the border with Bulgaria. As shown
in Exhibit 7, Ilovica is a porphyry copper-gold deposit, located in a
northwest-southeast-striking Tertiary magmatic arc that covers large areas of
Central Romania, Serbia, Macedonia, Southern Bulgaria, Northern Greece and
Eastern Turkey. The area comprises an undulating mountainous topography,
with moderately rugged steep slopes up to 30° and generally rounded mountain
tops, with flat valley floors. The PFS on the project anticipates annual production
of 95 Koz. of gold and 16 Kt of copper per annum.
Exhibit 7. Regional Location Map (Left) And Regional Geological Setting
Source: Company reports.
Solid Resource As noted above, Ilovica is a gold-copper porphyry with classic porphyry zonation
and minimal post mineral overprinting in the open-pit material. The project has
a pit-constrained measured and indicated mineral resource of:
237 Mt sulphide grading 0.33 g/t Au and 0.22% Cu; and,
36 Mt oxide grading 0.33 g/t Au.
From that resource, the PFS defined a Maiden Probable Mineral Reserve of:
209 Mt sulphide at 0.34 g/t Au and 0.20% Cu; and,
16 Mt oxide at 0.33 g/t Au.
Initiation: Timing Is Everything - August 13, 2015
12
The resource positioning is also very advantageous from a number of aspects,
including the readily available infrastructure that significantly enhances the
economics of the project. As we show in Exhibit 8, the mine itself will be
obscured from the nearby town of Ilovica by a deep valley next to the hill,
supplying ample capacity for life-of-mine tailings.
Exhibit 8. The Ore Body Is Very Well Positioned For Easy Access To All Needed Infrastructure, But Still Essentially Out Of Site – Even From The Nearby Village Of Ilovica
Source: Company reports and CIBC World Markets Inc.
Exhibit 9 summarizes the current Reserve / Resource Statement. We believe this
will see a significant amount of ounces reporting to the Proven Reserve category
when the next update is provided.
Ilovica Town In The Foreground – The Ore Body Sits In A Natural Amphitheatre Being Entirely Obscured From View By The Front Of This Hill
The Tailings Dam Will Sit In This Valley –Again, Not Visible From The Town, But With The Water Stream Diverted To Flow Past The Tailings Dam To The Users Down-Stream.
Ilovica Reservoir
Initiation: Timing Is Everything - August 13, 2015
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Exhibit 9. Current Ilovica Reserve & Resource
Grade Contained Metal
Reserve Tonnage (Kt) Au (g/t) Cu (%) Au (Koz.) Cu (Klb.)
Sulphide Probable 208,650 0.34 0.20 2,276 905,100
Oxide Probable 16,230 0.33 0.0 172 0.0
Grade Contained Metal
Resource Tonnage (Kt) Au (g/t) Cu (%) Au (Koz.) Cu (Klb.)
Sulphide
Measured 18,440 0.34 0.22 200 88,677
Indicated 218,640 0.33 0.22 2,341 1,036,427
M&I 237,080 0.33 0.22 2,541 1,125,104
Inferred 19,850 0.36 0.22 226 96,942
Oxide
Measured 1,340 0.38 0.0 16 0.0
Indicated 35,540 0.33 0.0 365 0.0
M&I 35,880 0.33 0.0 381 0.0
Source: Company reports.
Though the latest Resource numbers should reflect improved levels of
confidence (Resource moving into Reserve), we would not expect there to be
much in terms of resource upside at this stage as drilling is essentially focussed
on delivering the required confidence for the feasibility study. As such,
Exhibit 10 shows two sections through the optimum pit shells that will likely
remain very much unchanged.
Exhibit 10. Sections Through Optimum Pit Shells With Block Grades (Au equivalent)
Source: Company reports.
To provide a little more in terms of the lay of the land, Exhibit 11 shows some
views from the mine site, taken when we visited the site in early August 2015.
These pictures highlight that the ore body lies in a natural amphitheater that not
only “hides” the mining activity but crucially allows for a very low strip ratio of
just 0.7:1.
Initiation: Timing Is Everything - August 13, 2015
14
Exhibit 11. Panorama Around The Mine Site To Give An Indication Of The Lay Of The Land
Source: Company reports and CIBC World Markets Inc.
Mining Methodology And Sequencing The Ilovica mine site and facilities are based in two main areas, an Upper site
and Lower site. The Lower site has the run-of-mine pad and primary crusher
adjacent to the mine and pit exit around the 480 meter elevation. The haul truck
workshop and main fuel storage area are also adjacent around the 450 meter
elevation. The remaining facilities are located on an upper site around the
850 meter elevation. This upper site includes the crushed ore stockpile, process
plant, with gold room and product dispatch, and the ancillary facilities, including
the administrative and social building, stores and workshops.
The Ilovica PFS sees mining by conventional open pit using a large-scale mining
fleet. The mine will run at 10 million tonnes per annum (Mtpa), using 100 tonne
trucks, with leasing a possibility, although this is not incorporated into the PFS.
The initial stripping ratio at the mine will be 1.1:1, while the life-of-mine ratio is
forecast at 0.7:1. The early stripping requirements are high because of the
tailings dam construction.
Looking Back To Ilovica. The Mine Is Obscured From The Town
Crusher Site / Load PadConveyor Start To Plant
Natural High Wall Plant Site
Ore Body Lies In A Natural Amphitheatre (Low Strip)
Tailings Valley – Deep, Life Of Mine Capacity
Ilovica Rezervoir
Initiation: Timing Is Everything - August 13, 2015
15
The 23-year life of mine has been subdivided into four phases, designed to
balance: early capital payback; operational constraints; overall profitability; and,
a reasonable mine life. Phase 1, as shown in Exhibit 12, is the starter pit, which
will run during years one and two. Phase 2 comprises the expansion of the
starter pit and runs between years two and three. Phase 3, running between
years three and nine, incorporates a pushback and deepening of the mine, with
bottom elevation reducing to 400 meters from 480 meters in Phase 1 and
440 meters in Phase 2. Phase 4, running between years nine and 21, sees
further pushback and deepening, with the bottom elevation falling to
260 meters. Years 21 to 23 then see oxide stockpile milling.
Exhibit 12. Starter Pit – Phase 1 (Left) & Final Pit – Phase 4 (Right)
Source: Company reports.
Processing The process plant will be constructed for a 10 Mtpa capacity based on a
flowsheet that produces a saleable copper concentrate and maximizes the
overall copper and gold recovery. The Ilovica ore is derived from a porphyry
copper-gold deposit, is moderately hard, and is amenable to flotation and
cyanidation. Recent indications, though, were for a slightly lower work index
(slightly softer ore requiring less milling energy to break) and with the company
possibly looking to dump the initial oxide ore next to the pit, rather than pulling
it up the hill for treatment that only occurs at the end of the mine life, there
should be some capital savings.
The run of mine ore will be crushed by a gyratory crusher and then ground in
two stages, comprising semi autogenous grinding (SAG) mill and ball mill
conventional milling circuit in order to produce slurry with an optimum size
distribution for flotation and leaching.
Again, recent studies are focusing on possibly reducing the mass pull factor,
which may allow for less floatation at the expense of a small penalty on gold
recovery but significant savings in terms of initial capital requirement.
Initiation: Timing Is Everything - August 13, 2015
16
The overall copper and gold recoveries are estimated at 84% and 88%,
respectively. The ground slurry, with a particle size of P80 = 75 μm, is fed into
flotation to produce a saleable copper concentrate. The copper concentrate, at
an expected copper grade of 24%, is dewatered in the concentrate thickener
and filter and shipped for smelting.
Exhibit 13. Process Plant Layout
Source: Company reports.
As it stands now, the flotation tails are fed into a pre-leach thickener and the
thickener underflow will then be pumped through Carbon in Leach (CIL) tanks.
Flotation tailings slurry will be leached in 16 CIL tanks, which utilize cyanide
leaching and recovery of the dissolved precious metals onto activated carbon.
The carbon is then pressure stripped with a hot caustic solution to elute the
precious metals into a pregnant solution, which, in turn, is treated by
conventional electrowinning to produce a gold sludge that is suitable for direct
smelting on site. Tailings from the process plant will be pumped to the Tailings
Management Facility (TMF).
Exhibit 14. Ilovica Process Flow Diagram
Source: Company reports.
Initiation: Timing Is Everything - August 13, 2015
17
The location of Ilovica offers the potential to export the concentrate product to
smelters in Bulgaria, Serbia or overseas via road or a combination of road and
rail transportation. Euromax’s preferred option is to export the concentrate to
the Pirdop refinery in Bulgaria. The company anticipates transportation costs of
$45 per tonne of concentrate from Ilovica to the Pirdop smelter. The concentrate
will travel 47 km along the paved road haul to the existing Petrich rail loading
depot on the European Rail Freight Corridor 7. There is forward rail
transportation directly to the Pirdop smelter. The close proximity of this smelter
provides a significant working capital benefit to Euromax as the delivery
essentially happens within a week of loading on the train – allowing for almost
“just-in-time” delivery to the smelter.
Exhibit 15. Pirdop Is An Important Key In Making This Project Viable – Assuring Low Cost and Securing Debt Guarantees From
Germany
Source: Company reports.
The company has been conducting a lot of work to determine the acid drainage
risks of various types of ore. In Exhibit 16 we show the current batches of
different ore types left exposed to the elements and monitored to define
leaching patterns and acid capacity. This will be very helpful in establishing the
tailings facility and for ensuring the natural water supply remains unaffected by
the mining activity. From a mining perspective, the transition from oxides to
sulphides is very pronounced (as seen in the picture of the core) and should
assist greatly in mine grade control.
Initiation: Timing Is Everything - August 13, 2015
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Exhibit 16. Euromax Testing All Ore Types For Acid Drainage – Transition From Oxide To Sulphide Is Very Clear (Core On Right)
Source: Company reports and CIBC World Markets Inc.
Initiation: Timing Is Everything - August 13, 2015
19
Operating Cost Forecasts Per the PFS, the sulphide mining cost will be $1.72/t, the oxide mining cost
$1.96/t (including re-handle) and the waste mining cost $1.59/t (excluding
pre-strip). The total process plant operating cost has been estimated based on
the process design work and the reagent consumptions estimated based on the
prefeasibility study test work results. Per this work, the estimated process plant
operating cost is $6.50 per tonne, the split of which is shown in Exhibit 17.
Exhibit 17. Operating Costs (Left) And Processing Cost Split (Right)
US$/t
Mining Costs
Mining - Oxide 1.96
Mining – Sulphide 1.72
Mining – Waste 1.59
Conveyor 0.10
Processing Costs
Oxide Processing 5.23
Sulphide Processing 6.50
Infrastructure Opex 0.29
G&A 1.00
Source: Company reports and CIBC World Markets Inc.
Based on our analysis, these $/t costs equate to $/oz. cash costs of about
$500/oz. over the life of mine, with lower costs during the initial stages of
operation, a function of higher-grade throughput. On an AISC basis the number
comes to $800/oz. on a gold-equivalent basis. These costs would place Euromax
squarely in the bottom half of the international gold cost curve.
Consumables, $1.97
Reagents, $2.09
Power, $2.19
Labour, $0.11
Maintenance & Spares, $0.14
Initiation: Timing Is Everything - August 13, 2015
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Infrastructure Requirements As previously noted, the mine site and facilities are based in two main areas, an
Upper site and Lower site; the layout of the mine and associated infrastructure
are shown in Exhibit 18. Aside from the mining and processing assets, we
provide details of the other infrastructure requirements below.
Exhibit 18. Surface Infrastructure Overall Layout
Source: Company reports.
Logistics
The upper and lower sites will be connected to the existing highway M6 by a
newly constructed paved road. The new intersection at M6 is presently proposed
for construction between Turnovo and Sekirnik. A network of internal
gravel-covered roads will connect the site facilities.
Water
Identifying a sustainable water supply for the project is currently considered to
be the most critical issue. A number of options for water supply were considered
in the PFS. Current options include: 1) supernatant water from the tailings,
supplemented by inflows into the pit, run-off from the tailings/waste rock facility
and rain/snow falling within the catchment of the overall mine site; 2) make-up
water from the Turija reservoir via the Turija Canal to the Ilovitza reservoir,
which could supply some 2 million to 3 million m3/year; and, 3) a borehole field
around the uphill side of the open pit. Water supply options will be further
investigated during the feasibility study and the impacts assessed as part of the
Environmental Impact Study (EIA) in a way that evaluates impacts to the water
supply of third parties and impacts on other environmental or social receptors.
Initiation: Timing Is Everything - August 13, 2015
21
Power
Macedonia is connected to the European power grid via the National Grids of
Bulgaria, Greece and Serbia. A new power supply will be constructed to support
operations. This will include a 7.5 km, high-voltage transmission line from the
existing 110 kV transmission line some 2.5 km southeast of the village of
Ilovitza to the upper site substation. A medium- and lower-voltage distribution
network will supply power from the main upper site substation to the other site
facilities. The power requirements for the process plant are forecast at
approximately 42.5 MW and for other operations about 27.5 MW, for total
consumption of 70 MW. The Macedonian power cost is $0.08/kWh.
Tailings Management
Given the topography of the area and the quantum of material forecast to be
processed at Ilovica, tailings management is a critical aspect to the project’s
infrastructure and implementation. As such, Euromax engaged the Faculty of
Civil Engineering in Skopje to provide a preliminary design for a Tailings
Management Facility (TMF).
With regards to the construction and positioning of the TMF, Euromax intends to
use waste rock from the open pit for embankment construction. As a result,
10 Mt of waste rock mining will be brought forward to pre-production in order to
allow construction of the starter dam. The TMF will follow standard downstream
construction, with the crusher located at the starter dam site for engineered fill
on the upstream face. The plant will be located upslope from the tailings facility
for gravity-assisted distribution. Standard thickeners will produce thickened
tailings, while reclaimed water will be pumped back to plant for make-up water.
Exhibit 19. Upper Site Layout Showing The Processing Plant And TMF
Source: Company reports.
Initiation: Timing Is Everything - August 13, 2015
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Permitting
Mining Concession Approved
On July 21, 2012, pursuant to Article 33 of the Law on mineral raw materials,
Euromax was granted a 30-year Exploitation Permit & Mining Concession over
the Ilovica Project Area, by way of a 30-year lease for peppercorn rent to the
Ministry of Forestry (all state Forestry land). The granting and gazetting of the
concession was formally endorsed by the Ministries of Forestry, Agriculture,
Transport & Communications and Culture and ratified for approval by the
Ministry of Environment under the EIA.
Local EIA Approved
The Ilovica Project EIA was approved and gazetted by the Ministry of
Environment on September 27, 2012, pursuant to Article 87 paragraph 1 of the
Law on Environment. The approval provides for the mining and processing of up
to 20 Mtpa within the conceptual footprint of the project. The approval followed
local and national public consultation and was formally enacted into Macedonian
Law without any comment or objection.
Construction Permit
The Exploitation Permit requires the commencement of construction in Q4/2016
and, to achieve such, the Main Mining Project, a document confirming
development within the EIA approval and detailed to FEED level, must be lodged
for confirmatory approval by June 30, 2016. Euromax is preparing these
documents to the exact standards required to ensure, to the extent possible, the
granting of final approvals about 60 days after submission at the end of June.
Exhibit 20. Financing Running In Tandem With Mine Design And
Permitting
Source: Company reports.
Initiation: Timing Is Everything - August 13, 2015
23
Offtake / Debt
The Main Mining Project submission requires the timely finalization of a number
of other issues, thereby positioning Euromax to start constructing the mine by
the time the Main Mining Project is approved. Part and parcel is the final signing
of the offtake contract with Pirdop, as well as the bank debt commitments and
term sheets – all running in tandem with the mine design and permitting
process.
Given the need to be in position to build the mine once the Main Mining Project
is signed off (around the end of August/beginning of September 2016), Euromax
will have to ensure all funding is in place before then – possibly placing the
timing of the equity issue at around April 2016, by our estimation.
Capital Expenditure Requirements Per the PFS, initial capital expenditure has been estimated at $501.8 million,
with sustaining capital expenditure $236.1 million. The split of these capital cost
estimates is shown in Exhibit 21.
Exhibit 21. Ilovica Capital Expenditure Split ($ mlns.)
Item Initial Capex Sustaining Capex Processing Items Initial Capex
Mining Fleet $34.8 $128.0 Primary Equipment Cost $69.9
Processing Plant 249.5 (in opex) Indirect Capital Costs 125.8
Owners Costs 10.0 0 Site Prep & Construction Management
29.4
Infrastructure 103.8 30.6 Plant Mobile Equipment Cost 6.7
Tailings (incl. pre-strip) 58.1 47.5 Coarse Ore Stockpile Cost 14.4
Reclamation 0.0 30.0 Elution & Gold Room Package 3.4
Sub-Total 456.2 236.1 Total Processing Capital Costs 249.5
Contingency (10%) 45.6 0
Total 501.8 236.1
Source: Company reports and CIBC World Markets Inc.
As shown in Exhibit 21, within the processing cost capex estimates, the larger
components include primary equipment costs and indirect capital costs. Of these
indirect capital costs, there is $21 million for civils, $16.8 million for structural
steel, $24.5 million for piping and valves, $28 million for electrical and
instrumentation, $21 million for transport and $10.5 million for erection of
items. Within the infrastructure capex estimates, the largest component is
power supply and distribution at $50.6 million, with all other components
sub-$10 million.
Funding The Capex Spend We anticipate material capital expenditure to be incurred from 2017 (post
anticipated receipt of the construction permit in Q3/2016), with one and a half
years of construction before commissioning. We believe that the majority of the
capital will be incurred in year one of the build. However, given that Euromax
has about $10 million in cash, how does it propose to fund the $500 million
capital forecast?
First, the company has put in place an agreement worth $175 million with Royal
Gold. Euromax will receive within one year of the agreement two tranches
totaling $15 million and a third tranche of $160 million toward construction. This
cash from Royal Gold will fund 32% of the PFS construction capex and is in
exchange for selling 25% of gold produced at Ilovica at 25% of the prevailing
spot gold price, representing 14% of gold equivalent production.
Initiation: Timing Is Everything - August 13, 2015
24
Second, in May 2015, Euromax announced that it had received UFK in-principle
eligibility, the German Untied Loan Guarantee Scheme (UFK – Garantien für
Ungebundene Finanzkredite), to provide cover for a project finance facility on
the assumption that a copper concentrate offtake agreement is entered into with
a German-owned smelter. In association, the company executed a Mandate
Letter and Term Sheet with a number of European banks to provide up to
$215 million of Senior Secured Project Finance, subject to due diligence and all
necessary approvals. The company has also executed a Mandate Letter and
Term Sheet with Caterpillar Financial (CAT–NYSE) to arrange an equipment
financing facility for up to $25 million to finance any Cat equipment purchased
for the project.
Payback Period The PFS’ economic evaluation of the Project using discounted cash flow was
prepared on a pre-tax and a post-tax basis. For the 23-year mine life, 225 Mt
total throughput, operating at 10 Mtpa and using $3.00/lb. copper and
$1,250/oz. gold, the PFS returned the following financial results:
18.6% IRR pre-tax, 16.5% IRR post-tax;
6.3 years pre-tax payback, 6.8 years post-tax payback on $501.8 million
initial capital;
$675 million pre-tax Net Present Value (NPV) at a 5% discount value; and,
$558 million post-tax NPV at 5% discount value.
Naturally, these returns are a lot lower given today’s much lower metals prices,
with the cash flow sensitivity in Exhibit 22 indicating the project approaching
break-even around current metals prices (and based on pre-feasibility numbers,
which should improve somewhat once the feasibility numbers are provided).
Exhibit 22. Forecast Cash Position (At Spot $1,120/oz. Gold And
$2.40/lb. Copper) – Essentially Just A Little Better Than Break-even After Assuming $100 Million In Equity Funding
Source: Company reports and CIBC World Markets Inc.
-400
-300
-200
-100
0
100
200
300
2014A 2015E 2016E 2017E 2018E 2019E 2020E
Cum
ulat
ive
Cas
h B
alan
ce U
S$
Mill
ion)
-30% -20% -10% Spot +10% +20% +30%
Initiation: Timing Is Everything - August 13, 2015
25
Our Ilovica Forecasts Being a single-asset company, the profile basically ramps to full output (very
quickly given direct access to material with zero initial waste strip required) and
then drifts lower over time as grade declines. Cash cost numbers are low but
even AISC are around $800/oz. on a gold-equivalent basis and that still ensures
strong operational cash flow even at current prices. Of course, given overheads
and other costs, the net free cash flows are very low at current metals prices.
Exhibit 23. CIBC Forecast Commercial Production Profile 2018E–2025E
Source: Company reports and CIBC World Markets Inc.
Making real free cash flow (even if it is just a little) at current metals prices does
place this project in a very favourable position relative to the whole gold and/or
copper space and could be said to essentially guarantee strong upside gearing to
rising metals prices from here.
Exhibit 24. Ilovica IRR Sensitivity (Spot Basket = Copper At $2.40/lb.
And Gold At $1,080/oz.)
Source: Company reports and CIBC World Markets Inc.
-300
-200
-100
0
100
200
300
400
500
600
0
50
100
150
200
250
300
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Cas
h C
ost (
US
$/oz
)
Gol
d E
quiv
alen
t Pro
duct
ion
('000
oz)
Ilovica KMC Cash Costs (US$/oz)
0%
5%
10%
15%
20%
25%
30%
-30% -20% -10% Spot +10% +20% +30%
IRR
(%
)
IRR
Initiation: Timing Is Everything - August 13, 2015
26
Exhibit 25 illustrates the sensitivity of our Ilovica NAV estimate to metals prices,
costs and capital expenditure inputs.
Exhibit 25. Ilovica NAV Sensitivity At 5% (LEFT) And 10% (RIGHT)
Source: Company reports and CIBC World Markets Inc.
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
-30% -20% -10% Spot +10% +20% +30%
NA
V/ S
hare
(US
$)
Gold Copper
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
-30% -20% -10% Spot +10% +20% +30%
NA
V/ S
ha
re (
US
$)
Gold Copper
Initiation: Timing Is Everything - August 13, 2015
27
The KMC Project The KMC project is located in southwest Serbia, about 200 kilometres from the
capital, Belgrade. The licence covers 23.6 square kilometres and was renewed
for an additional two years on March 20, 2014. KMC’s mineralisation includes
thick sequences of gold-copper skarns, gold skarns, zinc-lead-copper-gold
skarns and volcanic-hosted, gold-mineralised silica breccias. We believe that
Euromax will continue to prioritise capital towards Ilovica, rather than KMC, as
indicated by the decision to suspend exploration expenditure at KMC during
2014. A possible sale of the asset is highly likely, in our opinion.
Exhibit 26. KMC Gravity Anomaly Map (Left) And Cross-section Through Medenovac Prospect
Source: Company reports.
Initiation: Timing Is Everything - August 13, 2015
28
Company Management Chief Executive Officer: Steve Sharpe
Steve Sharpe was appointed as President and Chief Executive Officer and a
director in May 2012. He is also an Honorary Board Member of Macedonia 2025,
a group dedicated to enhancing business opportunities and the economic
development of Macedonia.
Mr. Sharpe was previously Senior Vice President, Business Development at
European Goldfields Limited from July 2010 until March 2012, where he focused
on raising the profile of the company in the European and North American
market and developing the optimum financing solution for the advancement of
the company’s gold assets. Prior to that, he was Managing Director in Structured
Finance. He has over 25 years of investment banking experience, focused on the
mining sector.
Chairman: Martyn Konig
Martyn Konig was appointed as Non-Executive Chairman and a director in
May 2012 and is Chairman of the Compensation Committee.
Mr. Konig has 30 years of experience in investment banking and the commodity
markets. Until February 2012, he was Executive Chairman and President of
European Goldfields Limited. He has extensive experience in the natural
resource sector, which includes senior management responsibility in resource
finance and commodity trading operations at various international investment
banks.
Project Manager: Pat Forward
Pat Forward was previously VP, Projects & Exploration at European Goldfields,
where he was responsible for the development of the Skouries and Olympias
projects in Greece and the Certej project in Romania through feasibility work,
basic engineering and financing. In addition, Mr. Forward was responsible for
European Goldfields’ exploration properties in Romania, Greece and Turkey and
the growth and compliance of that company’s resource and reserve base.
In the early 1990s, he managed exploration projects in Europe, Ghana and
Venezuela before spending some five years in Burkina Faso managing
exploration programs. Mr. Forward is also specialised in geological due diligence,
resource estimation, the application of GIS systems to exploration projects, and
deposit evaluation, and is a Qualified Person with respect to NI 43-101
reporting.
Initiation: Timing Is Everything - August 13, 2015
29
Political Risk And Mining In Macedonia Macedonia is not the first location to spring to mind as a mining destination of
choice but, as Euromax is progressively showing, the country has the capacity to
further develop its (very) nascent mining industry. Indeed, Ilovica would
represent the first mining development by a foreign company in the country for
many years, although there remain a few other foreign-held development
assets, with Reservoir Minerals (RMC–SP) retaining the Konjsko and Dvoriste
exploration concessions in the country.
Outside of the development of mining as a source of foreign direct investment,
Macedonia has made significant strides in liberalising and opening up its
economy. Indeed, relative to its Balkan and Southeast European peers, the
country ranks favourably on the ease of doing business, according to the World
Bank, as shown in Exhibit 27.
Exhibit 27. World Bank – How Macedonia, FYR And Comparator
Economies Rank On The Ease Of Doing Business
Source: World Bank.
As shown in Exhibit 28, in terms of the World Bank’s ratings, the country
features very favorably in terms of the ability to start a business, the ability to
pay taxes, protecting minority investors, resolving insolvency and getting credit.
Unfortunately for Euromax, two critical areas of mining project development do
not feature so well, as dealing with construction permits and getting electricity
are the two worst-scoring components of doing business in the country.
However, it should be noted that even these represent low relative scores and
both components are still in the top half of global rankings.
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30
Exhibit 28. Components Of Doing Business In Macedonia
Rankings On Doing Business Topics (Scale: Rank 189 Center, Rank 1 Outer Edge)
Distance To Frontier Scores On Doing Business Topics (Scale: Score 0 Center, Score 100 Outer Edge)
Source: World Bank.
A new tax regime became effective in Macedonia as of January 1, 2009,
whereby the base for income tax computation was shifted from the “profit before
tax” concept to the “profit distribution” concept. As per the Macedonian
Corporate Income Tax (CIT) Law, tax is calculated and payable at a rate of 10%
on two components, and both components are taxed separately from each
other:
Component 1: Expenses not recognized for tax purposes and understated
revenues; and,
Component 2: Profit distribution.
The tax rate on both components is currently set at 10% and, as such, the PFS
applied this rate to the financial model with no tax holiday. The PFS estimates
that the total tax payable for the life of the project is $193 million. The PFS has
also applied a state royalty at 2% of the net smelter return (NSR). This is
estimated as an average annual cost of $4.3 million during full production from
sulphide ore. The total royalty payable is $92.7 million for the LOM.
Initiation: Timing Is Everything - August 13, 2015
31
Exhibit 29. Macedonia – Keen To Catch Up And Become Part Of EU
Source: Company reports and CIBC World Markets Inc.
Conclusion Euromax is a developing junior miner with a solid project in a solid setting and
sporting low costs that should see it deliver through-the-cycle value. This view is
backed by some 80% of funding that has already been secured, with the 20%
equity portion likely lining up in H1/2016.
The project reflects low-single-digit IRRs at current metals prices, implying that
it is not without risk, but given the low cost profile, chances are certainly higher
than average that this will be a good long-term investment that will also pay out
a very good dividend stream based on management’s strategy to spin out all the
free cash from this mine.
Lining up to build a mine is never without risk and investors with a low risk
appetite should probably hold off until the metal is flowing. For those
longer-term-focused investors, we would advocate buying sooner than later.
Initiation: Timing Is Everything - August 13, 2015
32
Valuation
Price Target Calculation The Ilovica Project is essentially a very low-risk project. The mining is easy and
implies low costs, providing good through-the-cycle potential. The funding is
already 80% secured and the offtake agreement with the nearby smelter adds
significantly to the favorable cost dynamics. Given management’s undertaking to
pay out all free cash flow generated from the project, the dividend potential
remains high and essentially secures an even better potential slice for investors
when or if metals prices were to rise again.
Still, given pre-development status, we apply a 10% discount rate to reach an
NAV of $0.58/share or roughly C$0.70/share at CIBC metals price forecasts
(gold at $1,200/oz. and copper at $2.75/lb.). Then, given the low-risk nature
explained above, we apply a full 1x NAV multiple to derive a price target of
C$0.70/share with a Sector Outperformer (Speculative) rating.
Key Risks To Price Target The key risks to our price target for Euromax are as follows:
Project Execution: Management has demonstrated a strong track record
in delivering projects to commissioning but risk remains in the execution of
Ilovica.
Country Risk: The company’s activities are materially focused in
Macedonia. As such, there is the potential for further negative impacts from
political and social unrest on the company’s assets and projects.
Resource Nationalism And Taxation: This is not a risk particular to
Euromax but to the entire natural resource and silver mining industry. As
with other producers, Euromax is susceptible to changes in taxation and
royalty regimes in the countries in which it operates.
Commodity Prices: Euromax is an unhedged producer of gold and copper
and, as such, is fully exposed to the spot prices.
The CIBC analyst(s) who cover this company visited the Ilovica Project site in
Macedonia on August 4 and 5, 2015, with Euromax providing accommodation
and meals and CIBC carrying the full cost of all transportation to and from
Macedonia.
Initiation: Timing Is Everything - August 13, 2015
33
Our EPS estimates are shown below:
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly
2013 Current -- -- -- -- ($0.10A)
2014 Current -- -- -- -- ($0.13A)
2015 Current -- -- -- -- ($0.09E)
2016 Current -- -- -- -- ($0.07E)
Our CFPS estimates are shown below:
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly
2013 Current -- -- -- -- ($0.06A)
2014 Current -- -- -- -- ($0.10A)
2015 Current -- -- -- -- ($0.09E)
2016 Current -- -- -- -- ($0.05E)
Initiation: Timing Is Everything - August 13, 2015
34
IMPORTANT DISCLOSURES:
Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or
at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein
accurately reflect such research analyst's personal views about the company and securities that are the subject of this
report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii)
no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by such research analyst in this report.
Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from
revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking
Department. Research analysts do not receive compensation based upon revenues from specific investment banking
transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from
executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets
generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that
such analyst covers.
In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report,
CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities
discussed herein, related securities or in options, futures or other derivative instruments based thereon.
Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures
set forth below, may at times give rise to potential conflicts of interest.
Important Disclosure Footnotes for Euromax Resources (EOX)
CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking
services from Euromax Resources in the next 3 months.
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered
by CIBC World Markets Inc.:
Stock Prices as of 08/13/2015:
Dundee Precious Metals Incorporated (2g) (DPM-TSX, C$2.18, Sector Performer)
Eldorado Gold Corporation (2g, 7) (EGO-NYSE, $3.81, Sector Outperformer)
Reservoir Minerals Inc. (2g) (RMC-V, C$4.18, Sector Performer)
Royal Gold, Inc. (2g) (RGLD-NASDAQ, $53.00, Sector Outperformer)
Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.:
Stock Prices as of 08/13/2015:
Caterpillar (CAT-NYSE, $77.76, Not Rated)
Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to
Important Disclosure Footnotes" section of this report.
Initiation: Timing Is Everything - August 13, 2015
35
Key to Important Disclosure Footnotes:
1 CIBC World Markets Corp. makes a market in the securities of this company.
1a CIBC WM Corp. makes a market in the securities of this company
1b CIBC WM Corp. makes a market in the securities of this company
1c CIBC WM Corp. makes a market in the securities of this company
2a This company is a client for which a CIBC World Markets company has performed investment banking services
in the past 12 months.
2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the
past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the
past 12 months.
2d CIBC World Markets Corp. has received compensation for investment banking services from this company in
the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the
past 12 months.
2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services
from this company in the next 3 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services
from this company in the next 3 months.
3a This company is a client for which a CIBC World Markets company has performed non-investment banking,
securities-related services in the past 12 months.
3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services
from this company in the past 12 months.
3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services
from this company in the past 12 months.
4a This company is a client for which a CIBC World Markets company has performed non-investment banking,
non-securities-related services in the past 12 months.
4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related
services from this company in the past 12 months.
4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related
services from this company in the past 12 months.
5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common
equity securities.
5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a
long position in the common equity securities of this company.
6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its
common equity securities.
6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this
company has a long position in the common equity securities of this company.
7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1%
or more of a class of equity securities issued by this company.
8 An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has
provided services to this company for remuneration in the past 12 months.
9 An executive committee member or director of Canadian Imperial Bank of Commerce (“CIBC”), the parent
company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an
officer, director or advisory board member of this company or one of its subsidiaries.
10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC
World Markets Corp., has a significant credit relationship with this company.
11 The equity securities of this company are restricted voting shares.
12 The equity securities of this company are subordinate voting shares.
13 The equity securities of this company are non-voting shares.
14 The equity securities of this company are limited voting shares.
Initiation: Timing Is Everything - August 13, 2015
36
CIBC World Markets Inc. Stock Rating System
Abbreviation Rating Description
Stock Ratings
SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months.
SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.
SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months.
NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock.
R Restricted CIBC World Markets is restricted (due to potential conflict of interest) from rating the stock.
Sector Weightings (note: Broader market averages refer to S&P 500 in the U.S. and S&P/TSX Composite in Canada.)
O Overweight Sector is expected to outperform the broader market averages.
M Market Weight Sector is expected to equal the performance of the broader market averages.
U Underweight Sector is expected to underperform the broader market averages.
NA None Sector rating is not applicable.
"Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.
Ratings Distribution*: CIBC World Markets Inc. Coverage Universe
(as of 13 Aug 2015) Count Percent Inv. Banking Relationships Count Percent
Sector Outperformer (Buy) 156 42.7% Sector Outperformer (Buy) 148 94.9%
Sector Performer (Hold/Neutral) 163 44.7% Sector Performer (Hold/Neutral) 153 93.9%
Sector Underperformer (Sell) 37 10.1% Sector Underperformer (Sell) 33 89.2%
Restricted 8 2.2% Restricted 8 100.0%
Ratings Distribution: Precious Metals Coverage Universe
(as of 13 Aug 2015) Count Percent Inv. Banking Relationships Count Percent
Sector Outperformer (Buy) 25 42.4% Sector Outperformer (Buy) 24 96.0%
Sector Performer (Hold/Neutral) 25 42.4% Sector Performer (Hold/Neutral) 25 100.0%
Sector Underperformer (Sell) 9 15.3% Sector Underperformer (Sell) 8 88.9%
Restricted 0 0.0% Restricted 0 0.0%
Precious Metals Sector includes the following tickers: ABX, ACA, AEM, AGI, AKG, ANG, AR, ASR, AUY, BAA, BSX, BTO, CDE, CEY,
CNL, DGC, DPM, DRD, EDR, EDV, EGO, EOX, FNV, FRES, FVI, GBU, GCU, GFI, GG, GSS, HAR, HL, IAG, KGC, KGI, LSG, NEM, OGC,
OR, ORE, P, PAAS, PAF, PG, PLG, PRU, PVG, RGLD, RIC, RMC, RRS, SGL, SLW, SMF, SSL, SSRI, TGM, TGZ, THO.
*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc.
do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World
Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and
sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.
Important disclosures required by IIROC Rule 3400, can be obtained by visiting CIBC World Markets Inc. on the web at http://researchcentral.cibcwm.com. Important disclosures for each issuer can be found using the "Coverage" tab on the
top left of the Research Central home page. Access to the system for rating investment opportunities and our dissemination policy, can be found under 'Quick Links' on bottom right side of the Research Central homepage. These important disclosures can also be obtained by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th
Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request
Initiation: Timing Is Everything - August 13, 2015
37
CIBC World Markets Inc. Price Chart
No rating history data found for Euromax Resources
Initiation: Timing Is Everything - August 13, 2015
38
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Initiation: Timing Is Everything - August 13, 2015
39
Legal Disclaimer (Continued)
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