Russian TEO status

Amur Minerals 3 December 2019 Update
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Amur Minerals

Russian TEO status

Financing and status update

Metals & mining

3 December 2019

Price

2.12p

Market cap

£18m

US$1.2980/£

Net debt (US$m) at 30 June 2019

0.7

Shares in issue

845.4m

Free float

99.5%

Code

AMC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

25.2

0.5

(34.2)

Rel (local)

22.9

(4.6)

(38.4)

52-week high/low

4.05p

1.68p

Business description

Amur Minerals is an exploration and development company focused on base metal projects in Russia’s Far East. The company’s principal asset is the Kun-Manie nickel sulphide deposit in the Amur Oblast, comprising over a million tonnes of contained nickel.

Next events

Gipronickel test-work results

Q120

FY19 results

June 2020

H120 results

September 2020

Russian TEO completed

December 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

Amur Minerals is a research client of Edison Investment Research Limited

On 4 November, Amur announced it had raised £1.2m (gross) via the issue of 70.6m shares at a price of 1.7p per share from an asset manager ‘specialising in natural resources’. This share issue is of material importance in advancing Amur towards completion of its mandatory Russian feasibility study (TEO) for its Kun-Manie nickel copper suphide project in Russia’s Far East. Due in December 2020, information included in the independently compiled TEO will also be incorporated in subsequent western feasibility study work.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

0.0

(1.9)

(0.3)

0.0

N/A

N/A

12/18

0.0

(3.4)

(0.5)

0.0

N/A

N/A

12/19e

0.0

(2.8)

(0.4)

0.0

N/A

N/A

12/20e

0.0

(3.8)

(0.4)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

A key upside catalyst

Amur’s development of the Kun-Manie project could be substantially enhanced. Results of metallurgical testing on a 10-tonne sample of ore by Gipronickel will be undertaken to establish optimal metallurgical recovery to a bulk nickel concentrate. This bulk concentrate sample will be examined to determine the suitability of producing separate copper and nickel concentrate streams. This test work is expected to be completed in Q120. The successful generation of a copper concentrate in addition to the nickel concentrate will increase total revenue generation beyond that presently reported in the February 2019 PFS. The results from the Gipronickel test work will establish the final process flowsheet to be adopted in the Russian TEO.

Potential 32.4% uplift in project NPV

In February, Amur calculated an NPV10 of US$614.5m (equivalent to 72.7c/share currently) for its toll smelting project development option and one of US$987.4m (equivalent to 116.8c per share) for its low-grade matte project development option. Assuming that a single all commodity bearing concentrate is generated, the valuation of the low-grade matte development option is unaffected. Should a separate stand-alone copper concentrate be generated however, it is anticipated that the combined sale of a copper concentrate and the generation of a low-grade matte from the nickel concentrate could be enhanced. However, for the purposes of this report, and assuming that a copper concentrate is generated, we estimate the US$614.5m valuation of the toll smelting option increases by 32.4% in the event of this contingency, to US$813.6m. Based on the EV/NPV multiples calculated in our report Gold stars and Black holes, Analysing the discount: From resource to sanction published in January 2019, at an average rating for a project at PFS stage, this NPV10 would imply an immediate valuation for Amur of US$80.5m (vs US$60.8m previously) or 9.5c/share (cf 8.7c/share previously).

Valuation: 5.3c per share with upwards potential

Based on our unchanged long-term nickel price of US$7.17/lb (cf a spot price of US$6.22/lb at the time of writing), we calculate an updated 5.3c/share valuation based on the NPV of the (fully diluted) stream of dividends that results from the proposed toll smelting development of Kun-Manie in FY19 (using a 10% discount rate) and an 8.7c/share valuation from the low-grade matte option. However, this 5.3c/share valuation potentially increases by 35.8% to c 7.2c/share if a separate, payable copper stream can be generated and to 10.1c/share in the event that the nickel price also rises to US$8.00/lb. The assumed valuation of the low-grade matte option remains unchanged at 8.7c per share (at US$7.17/lb nickel).

Fund raising, next steps and valuation consequences

On 4 November, Amur announced that it had raised £1.2m (cf a current cash burn rate of c US$0.2m pm) via the issue of 70.6m shares at a price of 1.7p per share. Of the total proceeds, £0.853m has been used to repay in full the convertible loans outstanding to Riverfort Global Opportunities and YA II (together Riverfort) together with interest due. In addition, the company has undertaken to find alternative sources of financing. The balance of the funds will be used for general working capital purposes and furthering work on the TEO.

Progress and next steps

This funding is a material step towards financing Amur for furthering the Russian feasibility, known as a TEO, which is scheduled for December 2020. To date, the company is reviewing the required rock mechanics study work, hydrology and slope stability analyses required for the TEO. The next key step in Amur’s progress will be completion of the metallurgical testing of a 10-tonne sample by Gipronickel to determine the characteristics of the bulk concentrate generated from Kun-Manie ore and whether it will be amenable to producing a separate copper concentrate stream. This test work is expected to be completed in Q120 and will determine the final process flowsheet to be adopted in the Russian TEO.

In the meantime, a new reserve and resource estimate will be produced around the end of Q419 under the auspices of the Russian system of resource estimation. Prior to the publication of a formal mine reserve and mine plan however, an estimate of a tonnage and average grade of the mineralisation will be completed based on Russian estimation methods. Similar to JORC resources estimates, new Russian resource numbers will be generated for all deposits and the newly defined mineralisation located between Ikenskoe-Sobolevsky and Kubuk that have yet to be reported in Amur’s JORC code-compliant resource (last updated March 2018). Once combined with a mine plan, this volume of mineralisation will then be classified into reserve categories according to the Russian/GKZ NAEN system of reserve classification for the purposes of the TEO (ie A, B, C1, C2, P1, P2, P3). It is mandatory that any reserve must be approved by GKZ or TKZ before mining is allowed. GKZ/TKZ approval also includes transfer of reserves to the national mineral inventory or the state ‘balance’ of reserves.

Once its TEO is completed towards the end of 2020, Amur will then have the opportunity to upload the results into a western-style bankable feasibility study (BFS) should it be necessary and based on the source of project financing. On current company estimates, this will take one more year (ie projected for conclusion in late 2021).

Valuation consequences and effects

On 26 February 2019, Amur announced the results of its updated pre-feasibility study (PFS) on its Kun-Manie nickel copper sulphide project. The PFS was based on information available in June 2018 and therefore included the March 2018 mineral resource estimate, but not the subsequent results of the 2018 field season, in which the area located between Sobolevsky and Kubuk was drilled and mineralisation determined to be continuous between the two deposits, thereby creating a single, much larger deposit. The study considered two development options (toll smelting and low-grade matte) and was conducted at a long-term nickel price of US$8.00/lb (US$17,640/t) and yielded an NPV10 for each development option of US$614.5m and US$987.4m, respectively.

The PFS did not include the potential economic uplift should revenues be derived from a separate copper concentrate, which has the potential to be materially value enhancing for the toll smelting option. In addition, whereas the nickel price was US$5.88/lb, or US$12,965/t, at the time of writing of our last report (Kunning, published on 10 April 2019), it has since risen to a price of US$6.22/lb, or US$13,715/t, currently. Assuming a long-term copper price of US$3.00/lb and 90% copper payability in a separate concentrate stream, we estimate the effects of each of these factors on each development option are potentially as follows:

Exhibit 1: Kun-Manie development option valuation sensitivity to nickel price and copper payability (US$m)

NPV10

Edison long-term price of nickel

Current price of nickel

PFS price of nickel

Development option

Ni price US$7.17/lb

Ni price US$7.17/lb

Cu payability 90%

Ni price US$6.22/lb

Ni price US$6.22/lb

Cu payability 90%

Ni price US$8.00/lb

Ni price US$8.00/lb

Cu payability 90%

Toll smelting

362.0

561.1

17.5

218.7

614.5

813.6

Low-grade matte

718.0

718.0

409.8

409.8

987.4

987.4

Source: Edison Investment Research, Amur Minerals

Note that, for these purposes, we have also assumed an additional c 15% (or US$80m) increase in initial capital expenditure (and therefore also likely future potential equity dilution as well) for the development of the infrastructure required to support a separate copper stream.

In contrast to the formal project NPVs calculated for each development option, our valuations of Amur include the effects of likely future equity dilution to develop the projects at the current share price. Since our last note, Amur’s share price has fallen from 2.61p at US$1.3242 to 2.12p at US$1.2980. In addition, we have updated our valuation to reflect both FY18 results and H119 interim results. The effect of both has been to reduce our per share valuations for each development option, from 8.2 US cents per share to 5.3c/share in the case of the toll smelting option and from 12.1c/share to 8.7c/share in the case of the low-grade matte option. The effect of changes in the nickel price and copper payability on these valuations is then provided in Exhibit 2 below:

Exhibit 2: Amur Minerals valuation by development option with respect to nickel price and copper payability (US cents per share)

Edison long-term price of nickel

Current price of nickel

PFS price of nickel

Development option

Ni price US$7.17/lb

Ni price US$7.17/lb

Cu payability 90%

Ni price US$6.22/lb

Ni price US$6.22/lb

Cu payability 90%

Ni price US$8.00/lb

Ni price US$8.00/lb

Cu payability 90%

Toll smelting

5.3

7.2

0.5

3.3

8.4

10.1

Low-grade matte

8.7

8.7

5.2

5.2

11.8

11.8

Source: Edison Investment Research, Amur Minerals

Note that, for the purposes of the analysis in Exhibit 2, all factors other than those explicitly discussed have remained unchanged.

Other opportunities

In addition to the potential to generate a separate copper stream, a number of other opportunities present themselves to Amur, which are likely to be considered in its TEO and/or any subsequent western BFS. These may be summarised, briefly, as follows:

Altered/improved offtake and/or funding arrangements with traders, offtakers and/or joint venture partners.

The potential for the Russian authorities to contribute to the infrastructure spend required to develop the project and especially the 338km access road. To date, the assumption in all of Amur’s economic studies has been that there would be no contribution from the Russian authorities at all in any form.

Potential capex savings by using non-branded capital goods.

The consequences for initial capital expenditure and cash-flow of using leasing mechanisms to secure the use of capital items (eg especially the mining fleet).

The potential to expand the operation beyond 6Mtpa.

The potential to enter into streaming arrangements as an alternative financing mechanism.

In addition, since Kun-Manie may be deemed a “regional project”, with collateral development benefits to the immediate area, there are a number of other potential opportunities available to it, including:

A profits tax reduction.

A royalty reduction.

A reduction in social taxes for employees.

A reduction/exemption from fuel tax.

In addition, there may be potential to optimise the production schedule and thereby to move revenues forward and generate enhanced early cash flow during the first 10 years of production. The biggest opportunity in this respect is the potential to merge the pits relating to the Ikenskoe and Kubuk operations into a single ‘mega-shell’, thereby simultaneously creating economies of scale and operating synergies as well as reducing the overall strip ratio of the operation. Additional enhancements include the potential to reduce the magnesium oxide content of the concentrate on which penalty fees are levied via additional metallurgical test work.

Financial and accounting

Readers should note that, for the purposes of our immediate financial forecasts in Exhibit 3, below, we have assumed that the start of development (construction) of the Kun-Manie project will not now occur until near end-FY21 (cf FY20 previously) and that interim financing will be conducted via short-term debt instruments. Self-evidently, some (or all) of this short-term financing could also be in the form of equity.

Exhibit 3: Financial summary

US$'000s

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

0

0

0

0

0

0

Cost of Sales

0

0

0

0

0

0

0

0

0

0

0

Gross Profit

0

0

0

0

0

0

0

0

0

0

0

EBITDA

 

 

(1,928)

(2,892)

(1,750)

(2,539)

(2,358)

(4,114)

(3,768)

(1,924)

(2,153)

(2,338)

(3,768)

Operating Profit (before GW and except.)

(1,928)

(2,892)

(1,750)

(2,539)

(2,358)

(4,114)

(3,768)

(1,924)

(2,153)

(2,338)

(3,768)

Intangible Amortisation

0

0

0

0

0

0

0

0

0

0

0

Exceptionals

(328)

(1,505)

(435)

(151)

1,158

1,184

(2,007)

767

67

306

0

Other

0

0

0

0

0

0

0

0

0

0

0

Operating Profit

(2,256)

(4,397)

(2,185)

(2,690)

(1,200)

(2,930)

(5,775)

(1,157)

(2,086)

(2,032)

(3,768)

Net Interest

0

(211)

(1,813)

(1,141)

(161)

2,224

4

3

(1,222)

(436)

1

Other

0

0

0

0

0

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

(1,928)

(3,103)

(3,563)

(3,680)

(2,519)

(1,890)

(3,764)

(1,921)

(3,375)

(2,774)

(3,767)

Profit Before Tax (FRS 3)

 

 

(2,256)

(4,608)

(3,998)

(3,831)

(1,361)

(706)

(5,771)

(1,154)

(3,308)

(2,468)

(3,767)

Tax

0

0

0

0

0

0

0

0

0

0

0

Profit After Tax (norm)

(1,928)

(3,103)

(3,563)

(3,680)

(2,519)

(1,890)

(3,764)

(1,921)

(3,375)

(2,774)

(3,767)

Profit After Tax (FRS 3)

(2,256)

(4,608)

(3,998)

(3,831)

(1,361)

(706)

(5,771)

(1,154)

(3,308)

(2,468)

(3,767)

Average Number of Shares Outstanding (m)

193.9

271.8

345.1

387.2

431.2

445.7

547.9

613.3

656.6

765.7

845.4

EPS - normalised (c)

 

 

(1.0)

(1.1)

(1.0)

(1.0)

(0.6)

(0.4)

(0.7)

(0.3)

(0.5)

(0.4)

(0.4)

EPS - FRS 3 (c)

 

 

(1.2)

(1.7)

(1.2)

(1.0)

(0.3)

(0.2)

(1.1)

(0.2)

(0.5)

(0.3)

(0.4)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

14,151

13,903

17,928

18,955

12,035

12,162

19,903

25,260

24,678

25,115

32,783

Intangible Assets

13,685

13,503

17,084

18,318

11,783

11,513

17,167

22,376

23,010

23,125

23,125

Tangible Assets

466

400

844

637

252

649

2,736

2,884

1,668

1,990

9,658

Other receivables

0

0

0

0

0

0

0

0

0

0

0

Current Assets

 

 

7,215

7,386

8,389

11,074

9,090

11,355

9,723

4,065

1,705

650

312

Stocks

167

165

224

269

237

512

756

769

257

303

0

Trade Debtors

0

0

0

0

0

0

0

0

0

0

0

Cash

3,066

4,436

2,048

2,392

1,389

9,613

8,199

2,555

1,257

35

0

Other receivables/other

3,982

2,785

6,117

8,413

7,464

1,230

768

741

191

312

312

Current Liabilities

 

 

(109)

(102)

(119)

(123)

(407)

(539)

(416)

(768)

(2,465)

(969)

(12,067)

Creditors

(109)

(102)

(119)

(123)

(407)

(539)

(416)

(768)

(802)

(969)

0

Short term borrowings

0

0

0

0

0

0

0

0

(1,663)

0

(12,067)

Long Term Liabilities

 

 

0

0

0

0

0

(509)

(3,461)

(176)

(299)

(299)

(299)

Long term borrowings

0

0

0

0

0

0

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

(509)

(3,461)

(176)

(299)

(299)

(299)

Net Assets

 

 

21,257

21,187

26,198

29,906

20,718

22,469

25,749

28,381

23,619

24,497

20,729

CASH FLOW

Operating Cash Flow

 

 

(1,201)

(2,761)

(1,071)

(1,556)

(1,960)

(3,090)

(2,210)

(2,703)

(2,586)

(2,147)

(4,434)

Net Interest

0

0

0

0

0

0

4

3

1

(436)

1

Tax

0

0

0

0

0

0

0

0

0

0

0

Capex

(492)

(20)

(3,482)

(2,315)

(748)

(2,751)

(4,533)

(3,704)

(2,051)

(322)

(7,668)

Acquisitions/disposals

363

0

0

0

0

0

0

0

0

0

0

Financing

3,527

4,344

2,165

4,242

1,841

14,407

6,589

570

1,791

3,345

0

Dividends

0

0

0

0

0

0

0

0

0

0

0

Net Cash Flow

2,197

1,563

(2,388)

371

(867)

8,566

(150)

(5,834)

(2,845)

440

(12,101)

Opening net debt/(cash)

 

 

(997)

(3,066)

(4,436)

(2,048)

(2,392)

(1,389)

(9,613)

(8,199)

(2,555)

406

(35)

HP finance leases initiated

0

0

0

0

0

0

0

0

0

0

0

Other

(128)

(193)

0

(27)

(136)

(342)

(1,264)

190

(116)

0

0

Closing net debt/(cash)

 

 

(3,066)

(4,436)

(2,048)

(2,392)

(1,389)

(9,613)

(8,199)

(2,555)

406

(35)

12,067

Source: Company sources, Edison Investment Research


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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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