Euromax Resources — Update 30 March 2016

Euromax Resources is a Canadian resource company that focuses on the acquisition and development of mineral-bearing assets in south-east Europe. Its flagship asset, Ilovica, in Macedonia, is the object of a recently completed definitive feasibility study, which is the subject of this report.

On the basis of our long-term metals price and funding assumptions (see Assumptions and Valuation on pages 6-7), we estimate the value of EOX shares to be C$1.08 per share, based on the net present value of maximum potential dividends payable to shareholders over the life of operations, discounted at 10% per annum. This valuation increases to C$1.79 in 2022, when debt is repaid and the first substantive dividend distribution is payable. Of note however is the fact that execution of the mining plan at the parameters indicated in the DFS implies future potential (fully diluted) EPS as high as C$0.43/share, ie in the same order of magnitude as the current share price, and average (fully diluted) EPS for the period during which operations are running at full capacity of C$0.18/share. Stated alternatively, investors buying Euromax shares at the current price of C$0.50/share may expect a 21.7% internal rate of return from their investment in Canadian dollar terms over a term of 25 years.

We estimate that Euromax had c C$1.0m of cash on its balance sheet as at end-December 2015. Hereafter, we expect it to raise both debt and equity to develop Ilovica. As it draws down debt to fund the initial capital expenditure at Ilovica, we estimate that net debt (excluding the contingent liability relating to its Royal Gold streaming agreement) will increase to peak at C$287.8m (US$217.8m) in FY18 – equating to a contemporary leverage (debt/[debt+equity]) ratio of 92.2% – before reducing under the influence of positive operational cash-flows until it is eliminated in FY21. Should the company instead decide to maximise its debt funding capability of US$240m (C$317.1m) however, it would require the raising of less equity and would result in a 12.0% uplift in our valuation of EOX shares to C$1.21/share (albeit with incrementally greater financial risk).

In qualitative terms, the principal risks to which the Ilovica project is immediately exposed include geographical/sovereign risk, geological risk, metallurgical risk, engineering risk, financing risk and management risk. In general terms, these are encompassed within what might be called ‘execution risk’, although many of these risks also have mitigating factors (see Sensitivities on page 8). Once in production however, these risks will be perceived to have reduced and other risks, such as commercial, commodity price, foreign exchange and global economic risks will become relatively more significant. In the meantime, our estimate of Euromax’s discounted dividend NPV sensitivity to a number of specific quantitative input parameters may be summarised as follows:

Euromax’s flagship asset is Ilovica, a copper-gold porphyry deposit in Macedonia, which is the object of a recently completed definitive feasibility study.

Ilovica lies within the municipality of Bosilovo, approximately 20km to the east of the town of Strumica, in the south-eastern province of Macedonia, close to its borders with both Greece and Bulgaria. Euromax holds two contiguous concessions at Ilovica, one relating to the Bosilovo municipality and the other relating to the Novo Selo municipality. Both concession agreements are for the exploitation of minerals and expire in July 2042 and January 2046. Both are in good standing. The land area granted for the exploitation of minerals amounts to 17.1km2. It remains state land. The right to develop the property is effectively granted through a construction permit and urbanisation process.

In defining Ilovica’s reserves and resources a total of 130 boreholes have been drilled over 42,032m (an average of 323m per hole) in 10 campaigns between 2004 and 2015. Of the total, 95 were drilled for resource estimation and 20 for geotechnical and 15 for hydrogeological investigations. The drill holes were generally vertical or steeply dipping, covering an approximately circular footprint, with a diameter of c 1km. For the purposes of the DFS, Euromax’s resource was updated and upgraded relative to its 2014 PFS. In general, while there was little increase in the overall size of the resource, there was a large increase in the size of the measured portion of sulphide resources at the expense of those sulphide resources in the indicated category, ie approximately half of the indicated resource was upgraded by means of infill drilling into the measured category. Similarly, the majority of the sulphide probable reserve was upgraded into the proven category of reserves. With the caveat that no data was provided for inferred resources, Euromax’s updated resource statement and its change from the previous statement is provided in the table below:

At the prevailing prices of gold and copper of US$1,243/oz and US$4,941/t at the time of writing, the updated resource equates to one of 5.0Moz of gold equivalent or 1,270kt of copper equivalent (2.8bnlb CuE).

In our report Gold: The value of gold and other metals, published in February 2015, we calculated in-situ values of US$141.95/t, US$23.08/t and US$39.82/t for the measured, indicated and inferred categories of copper resources, respectively. We also calculated values of US$24.07/oz, US$16.38/oz and US$12.60/oz for the measured, indicated and inferred categories of gold resources listed in London and US$48.08/oz, -US$0.80/oz and US$3.35/oz for the measured, indicated and inferred categories of gold resources listed in Canada. Note that these valuations include the values of co-products. Nevertheless, on the basis of these benchmarks, the Ilovica resource alone would be valued within the range US$52.0-78.8m. Euromax’s current market capitalisation of US$41.5m at the time of writing suggests Euromax is trading at a 20.2-47.3% discount to the in-situ value of its resources, notwithstanding their exploitation potential, as set out in the recent definitive feasibility study.

Similarly, the 2016 DFS demonstrated the conversion of 59% of probable sulphide reserves into the proven category.

Ilovica is located in a northwest-southeast striking Cenozoic magmatic arc that covers large areas of central Romania, Serbia, Macedonia, Bulgaria, Greece and Turkey. It is associated with a poorly exposed dacite-granodiorite plug, emplaced along the north-eastern border of the northwest-southeast elongate Strumica graben. At surface the Ilovica intrusive complex consists of a central dacitic breccia diatreme that has been intruded by at least one dacite and two granodiorite porphyry stocks that have generated several hydrothermal pulses, resulting in widespread, multi-phase veining within a mineralised stockwork.

The principal mineralisation to be exploited is chalcopyrite and pyrite. Both minerals are of a fine grain size, with chalcopyrite, D50 of 30µm, being finer than pyrite, D50 of 45µm. The distribution of gold is principally in the mineral grains, with no free gold being visible (ie militating against gravity separation). To maximise/optimise the recovery of both copper and gold, metallurgical testing indicated processing via bulk flotation to produce a single concentrate containing a saleable grade of copper and

Locked cycle tests indicated production of a concentrate containing 24% copper and 34g/t gold at recoveries of 82% copper and 65% gold. In the meantime, tests on the cyanidation and leaching of the cleaner scavenger tails indicated recoveries into solution of gold of 85-90%. A recovery of 60% of the contained silver was also indicated (although the silver content of the feed has yet to be established). NB To this end, Euromax intends to re-assay existing coarse rejects from the entire drilling database in order to map the silver into the geological block model using sufficiently low detection limits to enable the value of silver reporting to the doré bars to be assessed.

The mining method for Ilovica will use conventional drilling and blasting, together with trucks and shovel supported by a fleet of ancillary equipment. Drilling will be performed by tracked drills with 127mm diameter bits to a depth of 11m; blasting will be performed by contractors using ammonium nitrate and fuel oil (ANFO) slurry and non-electric detonation. Two hydraulic face shovels with bucket capacities of 16.5m3 will be used on ore and waste, loading a fleet of between nine and 19 90t nominal payload, rigid dump trucks. Ancillary equipment will include tracked and wheeled bulldozers for earthmoving, graders for road maintenance and water bowsers for dust suppression. A fleet of service vehicles will maintain the mobile mining fleet. There will also be a complement of utility excavators and pick-up trucks etc, such that the total mining fleet will vary from 47 at the start of operations to 74 at its peak. Similarly, the complement of machine operators is expected to increase from 108 initially to a peak of 183. Maintenance personnel are forecast to number 60 and management, technical and operations staff 60.

The process plant will be constructed for a 10Mtpa capacity (being limited by the profile of the open pit) to produce 78.8kt of (dry) concentrate per annum. Initially, the run-of-mine (ROM) ore will be crushed to a particle size P100 of 318mm. The crushed ore will then be further reduced in a semi-autogenous mill/ball mill/crusher circuit configuration to target a rougher flotation feed F80 of 75µm. The milled slurry will then be fed to the rougher/scavenger flotation circuit. Rougher/scavenger tails will be discharged into the tails thickener for disposal to the TMF. In the meantime, rougher and rougher scavenger concentrate will be collected and fed into the regrind circuit designed to target a mill product P80 of 25µm. Milled slurry will feed into the cleaner flotation circuit consisting of cleaner, cleaner scavenger and recleaner cells. Recleaner concentrate will be dewatered and stored as concentrate. The cleaner tails will feed the cleaner scavenger cells. Cleaner scavenger tails will feed into the leach and CIL circuit for further processing. Slurry from the cleaner scavenger tails will then be thickened and pumped through the counter-current CIL circuit for gold adsorption. Slurry from the last CIL tank will be thickened and the thickened slurry passed through a cyanide detoxification step before the tails are discharged into the TMF. The loaded carbon will be removed from CIL tank 1 and eluted, with the resulting metal-rich solution then being passed through an electro-winning circuit. Finally, the metal ‘sludge’ plated onto the cathodes will be washed off and filtered to remove excess water and the filter cake will be calcined and smelted to produce doré bars.

In formulating our financial model, we have made certain operating, financial and timing assumptions. Foremost among these is that construction will occur in FY17-18 and that production and throughput will then ramp-up quickly to 10Mtpa at average gold and copper grades of 0.32g/t and 0.21%, respectively, and that the stripping ratio will average 0.94:1 over the life of the mine, within the range 0.35-1.30 to one:

Additional operational and financial assumptions are summarised in the table below:

Gold price assumptions are those contained in our report, Gold: The value of gold and other metals, published in February 2015. Our long-term copper price assumption, meanwhile, remains at US$2.96/lb, or US$6,527/t. Whereas resulting revenues are denominated in US dollars (which are subsequently converted into Canadian dollars for the purposes of accounting), costs at Ilovica are typically denominated in euros.

Initial capital expenditure is estimated to be €431.2m, or US$480.6m at prevailing forex rates at the time of writing – equivalent to US$48.06 per tonne of installed processing capacity – apportioned as follows:

Excluding working capital, subsequent, sustaining capital expenditure (divided approximately equally between the tailings management facility and the mining fleet) is forecast to amount to €180.5m, incurred over 21 years, from FY19 to FY39 inclusive, at an average rate of €8.6m per annum.

Final closure costs of €33.7m (approximately equally divided between the processing plant and TMF) are expected to be incurred in the final three years, FY39-41 (inclusive).

In the meantime, operating costs are divided between fixed and variable. Over the life of mining operations, fixed costs are forecast to average €25.4m per annum, while variable costs are forecast to be:

Over the life of operations, the ratio of costs is predicted to be 26.7% to 73.3%, fixed to variable, respectively.

As stated in our update note of 14 May 2015, Euromax envisages financing Ilovica’s funding requirement via debt, equity and streaming in approximately the following proportions:

On the basis of the above assumptions (and assuming a notional US$100m equity raise in the form of 264.2m shares at the prevailing share price of C$0.50 per share and forex rate of C$1.3211/US$), we estimate a value for EOX shares of C$1.08 per share, based on the net present value of maximum potential dividends payable to shareholders over the life of operations, discounted at 10% per annum:

Crudely, this dividend flow comprises discounted positive cash flows from operations of C$902m minus C$663m in initial capex commitments, plus C$132m in near-term equity financings (equals C$371m), divided by 381.1m fully diluted (future) shares in issue.

However, of note is the fact that execution of the mining plan at the parameters indicated in the DFS implies future potential (fully diluted) EPS as high as C$0.43/share – ie in the same order of magnitude as the current share price – and average (fully diluted) EPS for the period during which operations are running at full capacity of C$0.18/share.

Moreover, this valuation increases to C$1.79 in 2022, when debt is repaid and the first substantive dividend distribution is payable.

Stated alternatively, investors buying Euromax shares at the current price of C$0.50/share may expect a 21.7% internal rate of return from their investment in Canadian dollar terms over a term of 25 years.

In qualitative terms, the principal risks to which the Ilovica project is immediately exposed include geographical/sovereign risk, geological risk, metallurgical risk, engineering risk, financing risk and management risk. In general terms, these may be summarised as execution risk – ie management’s ability to bring the project to account within its geographical jurisdiction and the required technical parameters. Once in production however, these risks will be perceived to have reduced and other risks, such as commercial, commodity price, foreign exchange and global economic risks will become relatively more significant. In the meantime however, a number of circumstances mitigate the initial risks identified.

From a quantitative perspective meanwhile, variations in Euromax’s discounted dividend NPV with metals prices, costs, the discount rate and foreign exchange rates, respectively, are shown in the tables below.

Note that the current copper price is currently 24.3% below our long-term copper price.

With respect to foreign exchange rates, the relationship between the Canadian dollar and the US dollar is merely one of conversion, whereas the relationship between the euro and the US dollar has a direct causative effect on margins (costs typically being denominated in euros, whereas revenues are denominated in US dollars) and is therefore significantly larger in terms of its effect:

We estimate that Euromax had c C$1.0m of cash on its balance sheet as at end-December 2015 (excluding the accounting ‘liability’ associated with the Royal Gold streaming deal). We expect it to raise US$100m (or C$132.1m) in equity, approximately coincident with the signing of final debt funding agreements with its consortium of banks. As it draws down debt to fund the initial capital expenditure of Ilovica, we estimate that net debt (excluding the contingent liability relating to its Royal Gold streaming agreement) will increase to peak at C$287.8m (US$217.8m) in FY18 – equating to a contemporary leverage (debt/[debt+equity]) ratio of 92.2% – before reducing under the influence of positive operational cash flows until it is eliminated in FY21.

Note that this estimated C$287.8m, or US$217.8m, net debt requirement is below the figure of US$240m (C$317.1m) for which Euromax’s consortium of financial partners has been mandated. Should Euromax instead decide to maximise its debt funding capability, it would require the raising of only C$104.2m (US$78.9m) in equity and would result in a 12.0% uplift in our valuation of Euromax’s shares (albeit with proportionately greater financial risk) to C$1.21/share.