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Wednesday, November 16, 2016 Derek Macpherson

Site Visit: Euromax is Getting Ready to Build


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Last week we visited Euromax Resources’ (TSX:EOX) Ilovica-Shtuka project in Macedonia. The visit confirmed our favourable view of the project and highlighted that Euromax is on the path to production in a jurisdiction that appears to be more favourable than we initially thought.


Site visit confirms our view of the project. Recall, the feasibility study released earlier this year suggested that for initial capital of US$474.3 million, the Ilovica-Shtuka project would produce 167k oz AuEq for 20+ years at all-in sustaining costs of US$372/oz AuEq. This provided the project with a post-tax NPV5% of US$440 million and a post-tax IRR of 17.8%. While the overall project grade is not impressive (P&P reserves, 0.32 g/t Au and 0.21% Cu), the low strip ratio (1:1) and simple logistics make the project work. The topography suits the project as Euromax plans to remove the side of a hill (Figures 1 and 2). We note that the ongoing Front End Engineering Design (FEED) study is likely to result in a slightly higher strip ratio in the early years of the project (vs. the feasibility study); however, the overall strip ratio is likely to remain unchanged. While the topography does present some design challenges, the relatively compact site (Figures 3 and 4) allows for simple on-site logistics and the proximity to the off-take partner, Aurubis’s smelter (300 km by highway,) provides for low concentrate transportation costs.





On the path to production. As mentioned, Euromax has started a FEED study which is both working to optimize the project and set final designs for long lead time items. This study should help de-risk the engineering and initial construction of the project and once the EPC contract is rewarded, de-risk the initial ramp-up. As well, the company appears to be aggressively building its in-house technical team. They have added, where required, non-Macedonian technical support but have also supplemented this team where possible with local talent. As well, the company is building out its non-technical team with key roles being primarily staffed with Macedonians. We view this is as important both from a government relations perspective and the long-term viability of the project.

Ilovica-Shtuka project is key for Macedonia. It is often the case that mining projects bring significant benefits to the local economies in which they are developed, and Ilovica-Shtuka project is not an exception. The project is expected to represent 1-2% of Macedonia’s GDP and provide a significant number of jobs in Strumica, the local community. As a consequence, we expect the company to receive approval for the ESIA filed earlier this year. We note that there is an election in Macedonia in December of this year, and we expect that this may delay ESIA approval to the New Year. However, it is our understanding that both the current Prime Minister and Leader of the Opposition support the project. While slightly delayed, we expect the project to receive permits because of both this support and its importance to the Macedonian economy.

Discounted per ounce valuation not reflective of projects potential or funded status. Euromax trades at C$16/oz versus similar development stage peers at C$42/oz. Considering this project’s advanced stage, meaningful scale, funded status, albeit with debt, and near-term permits, it should trade at least in line with peers. We note that Euromax trades at substantial premium to peers on a consensus NAVPS basis (1.47x vs. peers at 0.78x); however, consensus estimates appear to be out of date. We would also note that since our visit, Euromax announced its intention to raise C$35 million (pricing to be determined), which besides strengthening the balance sheet (repay debt) and providing sufficient cash to fund engineering activities prior to project construction, we expect this raise to improve the liquidity of Euromax’s shares. In our view, the pending permits are likely to be a key catalyst for the stock in early 2017 but the stock should also benefit from ongoing de-risking (engineering work).

Company Description: Euromax Resources (TSX:EOX) is an exploration and development company focused on its flagship copper-gold Ilovica-Shtuka project in Souteast Macedonia that hosts a resource of 5.4M oz AuEq (257M tonnes at 0.32 g/t Au and 0.21% Cu). The company’s Feasibility Study on the project suggests initial capex of US$474 million and annual production of 83k oz Au and 16k tonnes copper over an estimated mine life of ~20 years.

Derek Macpherson | VP Mining Analysis
Sunneva Bernhardsdottir | Associate, Mining Analysis
Victoria Ellis Hayes | Associate
 
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