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EUROMAX GETTING BACK TO THE BASICS FOR MINING INVESTORS
When Steve Sharpe and his management team decided to embark on a greenfield copper/gold- mining project in Macedonia in 2012, the idea was to bring mining back to its fundamentals. “We believe that shareholders should receive the full benefits of a mine’s performance,” he says. “We launched Euromax Resources Ltd. ( TSX: EOX) on the basis that the resource is a declining asset,” adding that the company made the leap from the Venture Board to the TSX on July 11.
As such, Eur o max’s Ilovica- Shtuka copper/gold site is being structured as a single project in which all cash flow is given back to the shareholders. “That’s completely unique in this industry,” says the president and CEO. The site is expected to produce 80,000 t roy ounces of gold and 15,000 tons of copper per year over 23 years. “That should be enough for anybody.”
The model means there are no big institutional shareholders putting pressure on the company to produce growth numbers, Sharpe explains. “A lot of mining companies go wrong chasing growth and putting funds generated into exploration. But in this sector, you’re only as good as your next project.”
Ryan Walker, mining analyst with Echelon Wealth Partners in Toronto, says there are few projects that plan to dividend out poten- tially all cash flow to shareholders for 20- plus years. “There aren’t many stories like that, especially in the junior mining ranks.”
In fact, there aren’t many j unior mining stories of note overall. Walker notes that the mining sector has struggled over the past five years. “The major sticking point is that existing miners haven’t been exploring, and at the same time, the project development pipeline has quickly emptied out and not been backfilled.”
With its unique model and location, Euromax is making significant progress despite the sector’s struggles. Since launching in 2012, the company has put together a US$ 400 million financing package in which EBRD ( European Bank for Reconstruction and Development) is the major shareholder. In addition, the German government has guaranteed up to US$ 240 million ) for financing the construction.
As the first greenfield development in the Balkans for 30 years, Sharpe says the Ilovica- Shtuka project will become part of the fabric of Macedonian society and its economy, and is expected to grow the country’s GDP by 2.5 per cent. “In fact, we will be the first international company to be headquartered in Macedonia. We believed that was the right thing to do for emerging market development.”
Having visited the site, Walker says t he project would transform the region in terms of employment and economic growth. “You don’t hear a lot of bad news coming out of Macedonia, and the potential boost this project will bring to the country’s GDP is not insignificant. The EBRD also happens to be a very big investor in Macedonia. And all the vetting and permitting has been done well in advance, so there should be no surprises. In other words, they have a clear path to do this.”
At this moment, Euromax has submitted final documentation for a construction permit ahead of schedule, and expects permitting to be completed by September. The two-year construction period includes six months of rampup before reaching a steady production state in 2018.
Overall progress has been relatively smooth by industry standards, Sharpe reports. Environmental and social studies were kicked off very early in the process. “That’s how we were able to attract EBRD as our largest shareholder. More important than the economics of the project was its desire to support Macedonia as an emerging market.”
Being in t he heart of Europe, the infrastructure is second to none, Sharpe notes. “Macedonia was new for all of us. But we have had overwhelmingly positive experiences. We were delighted to find a young, dynamic and forward-looking government committed to making foreign direct investment the cornerstone of its economic policy and to getting things done.”
By way of example, in initial talks with government, Euromax asked for changes to the mining law. “Their laws stated you had to go into production within two years of being granted a concession,” Sharpe explains. “This wasn’t nearly enough time to complete proper en- vironmental baseline work. Two days later, the law was changed to give us f our years. That shows they have the foresight and trust in us.”
Anthony Fierro, portfolio manager at PI Financial Corp. in Vancouver, says the location is reasonable in terms of the geopolitical climate. “The team has a strong social mandate and a good relationship with a government that wants to see the project move forward. There is potential for some improved economics coming into play on this project.”
Macedonia’s eagerness to support the project in no way compromises the due diligence process, Sharpe stresses. “This project has entailed one of the best environmental and social studies in the market. EBRD is using it as a case study on how environmental study and monitoring should be done.”
The economics of the project are also conducive to success, he adds. “The reason why this mine works so well is because we are taking ore off the side of a hill. There’s no strip to speak of. A low strip ratio is less capital- intensive so proceeds go straight into mining and generating cash flow. Simply put, you use fewer materials before you get to the ore body. Once we’re over the capex, processing will be simple, clean and economical; and the costs of the project from an operating point of view will be into the lowest quartile.”
Euromax has also signed a 10- year off- take contract with a Pirdop copper smelter and refinery owned by German- based Aurubis, located 200 kilometres away in Bulgaria. The proximity keeps transportation costs down to just over $20 a ton, Sharpe explains.
Despite the downturn, Walker says Euromax has key elements that bode well for the Ilovica- Shtuka copper/gold project. “The gold stream is in place; the financing is there; they have excellent government support; they are surrounded by excellent infrastructure; and the timing of the project’s startup could benefit from a potential supply copper deficit. Additionally, the long-lived mine [20-plus years] has the potential to benefit from multiple commodity cycles.”
Walker says the two years it will take to get the mine up and running should prove fortuitous, as analysts are looking at a deficit in copper supply by that time. “If that’s the case, they will be hitting the market at the perfect moment. As far as where gold will be in two years — that’s anybody’s guess. But considering the state of the world, it looks like it will be going higher.”
An additional contributing factor is that the gold market may be poised to enter a new bull phase, he adds. “The timing for this project is very good in light of the likely fact we’re at the bottom of a commodity cycle. They have a six-month window or less to make a go to production decision which if it is a go will likely give them a nice tailwind into the next cycle. Also, the financing is relatively secure as there is a political bias to help develop the eastern regions of Europe.”
As Fierro points out, “There wouldn’t have been a better time to develop a project in the region. Euromax is likely entering the cycle at the appropriate moment to achieve success; and it appears they have all the right attributes to make it work.”
THE TEAM HAS A STRONG SOCIAL MANDATE AND A GOOD RELATIONSHIP WITH A GOVERNMENT THAT WANTS TO SEE THE PROJECT MOVE FORWARD