Dmitry Suschov on Eurasia Mining‘s (UK, LSE (AIM): EUA) news and strategic opportunities for precious metal mining projects.

VIDEO [English; Translation Support]

Dmitry Suschov is an investment banker with extensive experience in the resources industry having previously worked in major investment banks, as well as PricewaterhouseCoopers and Ernst & Young as mining & metals leader in corporate finance for Russia and CIS. Currently, in addition to Eurasia Mining, Dmitry is a co-founder and a supervisory director of Lybrion, Goldman Digital comradeship, international digital investment advisory companies, and a shareholder and strategic finance counsellor of the large European accelerator Moonwalk, holding for more than 20 early growth companies.

Interview transcript

Q1. Dmitry, tell me a little bit more about yourself and your involvement at Eurasia?

Right, so I’m an investor in the mining space. And I follow long-term trends in the mining space. I’ve been in some strategic minerals, and what I’ve been doing is I’ve been investing at early stage – de-risking projects moving them from exploration stage to feasibility and sometimes even to production, like in the case with Eurasia. Then I’ve been selling a number of projects to strategic investors that include a sale of silicon carbide used for solar applications. That was a hot topic in the past, and still is actually. I almost sold to [the largest player in the industry] and then the Indian [group] made a better bid, and we closed this deal back in 2007. And then, I sold one of the businesses to [large banks] and also a natural resources business to a Danish fund. And also a coal business – which was a couple of years ago.

Now, I am entirely focused on Eurasia. I think Eurasia has high quality assets. So it’s primarily two assets, which we are focused on. One is WK, which is in the southern Urals part of Russia. And WK is the mine, which is in production. It started as JV with Anglo American, the world’s largest platinum producer (about 40% global market share of Platinum) and that was a 50/50 JV which started in 2000.

We’ve been doing the exploration works – a very comprehensive exploration program of a big chunk of land of about 150 And then in 2014, AA decided to leave everything outside of South Africa, which wasn’t a wise decision, I think. Now, I think they have changed their mind in this regard. But that gave us an opportunity to buy Anglo’s share at a very good price and then basically we started production two years ago [2016] as a pilot scale and an industrial scale in [2018].

So, it’s very rare for the junior mining companies to go into production, and we’ve already been in production for quite some time, successfully. Most recently, in September [2019] we completely took over the production from contractors, because previously the contractors were consuming most of the margin, and now we enjoy 100% of the margin. So, that is a significant milestone, which we achieved last month.

And plus we’ve expanded our production license from 20 to over 100 which is very significant because we drilled, as I mentioned, a much bigger area [150 more or less] and we’re just expanding within this area which we drilled in the JV for approximately 15 years. So, we know this area very well. That is our one asset and we have a basket of metals there, which have the four PGM’s [platinum group metals]; platinum, palladium, iridium and rhodium – and a little bit of gold.

Now, everybody talks about palladium, and I understand that, but at the same time we have rhodium. A very significant rate of rhodium and rhodium is $5000/oz so a much higher price than palladium and all the other metals in our basket. So, that’s what we do there. And there are companies that are operating in this similar space where West Kytlim is and WK is the largest producer of the sort in the ‘soft rock’ form. [We call it soft rock because it’s very similar to hard rock open pit operations but you don’t need to blast; just straight excavate the soft rock. And that basically means the cost if very low. So it’s typical open pit, you just don’t need to drill and blast prior to excavation. And that reduces the cost significantly]

Q2. What are your costs?

I think we put it in the public domain so I can announce it is within the range of $300-400/oz. So even with Pt price staying around $900/oz [let alone other metals like Pd $1800, and iridium – roughly same price as Palladium, and rhodium, as mentioned, $5000] so with this we are in a very good shape and obviously being a low cost producer like Norilsk Nickel, the largest palladium producer in the world, we will be the last one to die if something happens to the prices. But, we don’t expect the prices to do down because they are in a structural deficit. That’s where we are.

Q3. So how much did you say you’re currently producing at the moment?

Right, so the maximum rate we reached per day is about 7kg per day, which is about 200oz/day. So it’s quite a significant rate, and to be sustainable with this kind of rate we are now undertaking quite a significant exercise. So we acquired our own enrichment plant earlier this year. And we took over production from contractors because contractors aren’t sustainable. They’re always trying to renegotiate and sign different terms of use rather than to leave the site etc. etc. So just learned the hard way over the 4 years of production – pilot production and industrial production since 2018.

So we’ve learned the hard way, and now we’ve decided that we can do it ourselves. Because since 2016 we’ve been gradually building our own team and we just proved recently that we can do it ourselves without any contractors and that first of all gives us 100% of the margin, which is good so we get more cash. And secondly, and more importantly, is that it’s more sustainable. Because it was contractors that were leaving the site, and saying they won’t resume until [you] resigned the terms and give them a higher margin etc. etc. so it just goes to and fro. It’s much more reliable if you do it yourself.

Q4. What are you doing at Monchetundra?

At Monchetundra we are doing preparatory works on the ground with our own team. Plus, we use very reliable contractors, to include for example, CKE which the company that works for a number of strategic inventors in the region. To mention a few; Barrick Gold, which is the worlds largest Gold company which has a Pd project just 150km distance from Monchetundra. So Barrick has a Pd project in Russia, close to us. CKE used to do work for [Barricks], and then basically also for Norilsk Nickel, and [other] big companies. So they are reliable people and we worked with them our exploration stage also on this project. Again, MT project stared as a JV with Anglo American in a 50:50 way.

We started drilling later, in 2005, 5 years later than WK. That’s why it’s coming into production later, a natural cycle. And again, we drilled quite a bit of chunk of land and we received (similar to WK) a much smaller Production Licence. However, I will have the right to get an additional area within 5km around our licence. Then basically 5km to each of the sites, and that’s what we have already done. We have announced it in the public domain and we know the area well because we drilled it ourselves.

Plus it has been drilled by a number of our colleagues, like Norilsk Nickel, who have been drilling one of these areas. But NN are the worlds largest Pd producers so they are really sitting on their very region of huge deposit. So, for them, those bits and pieces that they were drilling are not so significant. But if you combine them all together they become quite significant for independent producers like us.

Q5.Well, as you point out its Palladium in particular which is getting everybody excited at the moment. How much have you got, across your projects? What’s your resource?

I can only operate on numbers, which we announced, because I am a director of the company. So we have initially received a smaller licence, similar to the way we did at WK. (So, as I mentioned, we have 150 sq. km. but started with a licence of 20 sq. km. Just a tiny bit of that).

And then we applied for flanks, 5km around it. So now, our total area at West Kytlim is 117/118 sq. km. So it’s getting to practically the size of our exploration licence of 150 sq. km. So that’s how it works and basically, we follow the same steps. It’s good [use own experiences].

We again initially got a much smaller licence, and this covers about 2 MoZ of Palladium equivalent (primarily palladium) and then we applied for flanks area, and our chairman recently announced in one of our RNS’s [last week] put forward the number of 15 MoZ of Pd. I trust him because he is one of the top geologists on a global scale, one of the founders of CSA Global, which is a top mining advisory. And he’s done a number of discoveries, waiting for industry and big companies and now grateful to have him on our team. So, that’s what we announced, and I think that really puts us in a different league of Palladium companies.

Q7. So the company’s estimates are 15 million in the ground, at the moment?

That’s including the flanks, right. Exactly right.

Q8. Well your strategic adviser Alexei Churakov put out this number of 40moz how does that come about?

What Alexei meant, on the Kola Peninsula there have been a number of exploration taken place. So it’s not only us – it’s Anglo American that has been doing extensive exploration programme within a big chunk of land, which WE are gradually going to apply for. Also, there have been [Norilsk Nickel], as Imentioned, doing exploration. Then [Barrick] doing the exploration, again, on a big licence – a palladium licence. And some other players.

And we are looking at those projects as well, because as a mining company our main business is to produce the metal – which we are successfully doing – at our operating mine. So we’ve proved that we can do it, and we’ve done it before on a different project, our team members.

And then, basically, our second job is to continually increase in our resource base. And we are looking at different options, and what Alexei mentioned was that there are a number of deposits which are close to our deposit which in total have this “40 moz” so that’s what he meant.

Q9. Is that on top of the “15 moz” or “Total”?

Can’t speculate [total?] That’s something we are looking into, right. So once we apply for those areas – and we will go through a step-by-step standard licensing process, which we have been doing before – so once applied for those areas, we will disclose all the details (Now, as a director, I wouldn’t speculate about that).

Q10: But have you begun the process of applying, then?

Well, the process of applying basically consists of piling together quite a significant amount of documentation. And, of course, through the process of looking at different projects, we are first accumulating this information and once we are ready, we apply- because applying [is like clicking a button] but, the preparation work needs to take place first.

Q11. On the operational side of things re: Sinosteel. Have you received that first payment yet?

With Sinosteel we signed all the final binding documentation, which allows us to receive the first payment.

We are not rushing into this first payment for a number of reasons.

  1. We are not in need of any cash, in a good financial position.
  2. Therefore they are considering different options, reviewing which is the best option for us to pay dividend: because not only receiving cash flow from existing operations but also recently exercised warrants. Now we have a pile of cash which, it makes sense to give back to the shareholders. Basically something that we don’t need at the moment. The point is that we don’t need this cash, we have more than enough, hence dividend options.
  3. Works we are doing now with CKE are sufficient to move us forward, in terms of the preparation to the mining.
  4. Also we are in discussions, as announced, for example with Lesego Platinum AND some others, and those companies have their own views in terms of which company should be a contractor. And some of them like Sinosteel (like us), some of them have other preferences – it’s not that Sinosteel are good or bad, some companies have their own preferences and their own experience.

So we are not rushing with moving ahead with Sinosteel. We are doing work with different contractors in preparation for mining. At the same time, we don’t need to rush into it. When people rush into it, they normally make mistakes. So, we want to do everything properly.

Q12. [Recently] been uplift in share price. What is that based on? Is it speculation of a deal? Or of talks? Or have talks begun?

First of all, we announced Lesego Platinum’s CEO visited both of our mines and have been doing due diligence for quite some time. So, obviously, we are havingtalks – and this is in the public domain.

And the fact that large investment banks like VTB Capital and CITIC means that something is going on. And I think, I can’t speculate too much about it, but people can judge from the size of the Banks involved and also from the fact that they agreed to work on a success fee basis. And because, obviously, they don’t want to waste their time – we are in discussions.

At the same time, I wouldn’t attribute the share price to rerate through pure speculation. There might be some speculative element into it, but mind you I started to invest at 5p right, currently the price is lower than 5p. And I invested not because of any kind of speculation, but because I assessed the fundamentals of the company and I’ve been investing in the mining space for quite some time. And I was looking at fundamentals of the projects and also some deals taken place recently. For example, at that point in time, First Quantum acquired a project just across the border in Finland in the very early stage about $200mln. with the same basket of metals as Monchetundra.

So I was benchmarking against this deal, and I think what we are seeing now is people [both retail and institutional investors] are looking at the fundamentals of the projects. And they are looking at our cash flow, which is coming in, and they’re assessing the probability of the dividend. And they are also looking at the strategic options that are open to the company, of course. We don’t rule out anything happening, so let’s see how it goes.

Q13. Well that $200mill deal there, how does your resource, your PGMS and your amount of Pd compare to theirs?

That project, which is across the border in Finland, at the point in time of the deal in 2008 or earlier in fact, when I started to invest in Eurasia, that project was in an early stage. It was difficult to judge what kind of resource they had because since then our projects have dramatically improved. And this project has definitely developed. But the NPV of that project, on the basis of some kind of pre-feasibility study which they had [a really early stage PFS] the NPV was about $90m. At a discount rate of 8% or so. So it was quite a small project NPV basis and it was acquired for $200m. First Quantum that acquired it realised the fundamentals of the metals being acquired and they recently sold it to Boliden for $700m and done a good job!

Q14. Can you tell me how many groups or parties you are talking to at the moment?

I cannot again speculate about talks going on. Except, which is already in the public domain. I think we mentioned quite a few names, not just Lesego Platinum but some other companies, over time. So you just need to look up our RNS’s previously to the Lesego [transaction] where we mentioned potential transaction, recently. So basically, the fact that the banks decided to jump into means that they would like to bring some kind of competition to this process.

And I think it’s a healthy competition for all the shareholders. And will allow the investors to compete with each other and bring fair valuation. Because competition obviously helps to asses and valuate the project properly. And also we need to take into account that the palladium fundamentals have quite a lot over the last few years. The Pd has run into fiscal deficit, [example of deficit]. That’s because when you are dealing with industrial products which have industrial applications, people need it to produce their products. The steelmakers need to operate their blast furnaces otherwise the steel will just get stuck there, and they need to rebuild their furnace. That’s the same with Palladium, catalyst producers need it – once it’s in fiscal deficit they’ll pay the price, because it’s just a tiny share within the price of the end product. So they can pay literally any price, and you see it with Rhodium for example. Rhodium price e.g. is $5,000/oz – nobody’s crying about it because it’s a tiny share of the cost that produces the end product. So, we see some similarities with what happened with [] in 2016, where the price rerated a few times within a few months and stayed on a high level since 2016, and we are in 2019 now.

So the fundementals are good and that’s obviously helping us and raising interest towards Palladium and with recent transactions taking place like Sibanye buying Stillwater for $2bn, Impala buying NAP for CAD$1bn so with all these deals taking place there are not too many companies which allow exposure to Palladium.

E.g., f you and I want to buy exposure to Pd we can’t buy Stillwater [diversified company] or Impala [primarily platinum company]. If you are talking about Pd companies that are in production and not yet consolidated and listed in London – you don’t have too many options. That’s obviously what is helping us.

Q15. You talk about fair value, what do you think this project is worth?

Again, I can’t speculate about valuations. And what I think people need to keep in mind is that once VTB and CITIC agreed to work with us [and they are big banks] they’re not going to bring any kind of small deals to us. People can just look up and see what kind of deals they are doing, and that would be reasonable to say. I can’t speculate about valuation. Again, there have been quite a few deals taken place in the industry and those are good deals to benchmark against.

Q16. What would you not accept then?

I think now that the people are interested in Palladium and obviously there’s a lot of companies operating in the PGM space that now want exposure to Pd because it’s fundamentals are very good.

And also we have open pit mines, which are very different to typical PGM mines [underground]. So you have a number of parties that are interested in Palladium Open Pit and I think they know each other, more or less. And they know there is a competition, especially after big banks joined the process. I don’t think we will see some kind of unreasonable proposals. I think people are sensible of what’s going on.

Q17. Realistically, how long might it take to get a deal done?

My experience suggests that it can be very different in time and at the same time what I want to highlight is that we probably shouldn’t rush into it. Because, there’s no need for us to rush. We’d better assume that all the interested parties are/would be rushing because they more or less know each other and the Banks involved. And the Banks know how to do this better than us. We [working as hard as before]. We are scaling up production, we are increasing our resource base, applying for additional areas etc. etc.

At the same time, it would be wiser to allow the interested parties to rush us and ourselves being rushed – it will definitely give us an advantage in the tactical negotiation position.

Q18. You say ‘there’s no guaratnee’ of a deal being done. But you’re fairly confident?

Look, regarding this quote, which you’re referring to, it’s a very typical quote, which any sensible advisor would add to any press release/any RNS in a London listed company. So they always add some kind of qualifications, it’s normal qualifications that, at least, our NOMAD [I’m sure others] add into. Because there are NOMAD there are regulators. And that’s quite normal. People need to asses [the probability] on their own. They can just see what’s coming in the public domain from our side and from the size of the banks involved and the fact that they’re operating on a success fee basis. So definitely, they are assessing probabilities themselves, when they make a decision to work without any retainer – on a success fee.

So I think those are the arguments which reasonable to mention without going into something that I cannot say as a Director.

Q19. Well, given that as you say, when you first invested when it was 5p, you’d want a multiple of that to see a decent return of your investment.

I am not again going to speculate about the price. And if, and when, the offers are coming on the table, I will definitely be looking at them and assessing and we will go for the best deal on the table. And regarding my own investments, I am also a shareholder of the company, not only a director, so will be looking at the offers and finding the solution that works for all the shareholders.

Q20. Are you excited? Are you pleased with your investment so far?

Yeah, Eurasia has been doing very well. When I started EUA didn’t have any production licensing, it was all exploration stages [which is a typical investment that I’ve been undertaking]. Now we have production up and running since 2016/18 and now we’ve taken over production ourselves – a big mile stone. Allows us to enjoy 100% of the margin. And that’s something very few junior companies achieve. Normally, the projects are sold after some kind of good drilling results or at best PFS so in our case we reached production stage. Which is very rare. Of course, I am pleased to be already in production and secondly we are working with CKA and other contractors to move our larger Pd dominant mine into production. And we have significantly increased our resource base with these flank applications, on both our operating & our Monchetundra mine. So there is no reason to be sad, and there are all the reasons to be grateful.