Joel’s Resource Report – Liquidity Returns #EUA #EML #RSG #I3E #RRE

Joel’s Resource Report – Liquidity Returns #EUA #EML #RSG #I3E #RRE

At the time or writing, the author holds long positions in EML and RRE.

The past week has seen a number of AIM resource companies shares experience dramatic gains: I3E, Eurasia and ACP, for example.

I must admit to feeling a touch of FOMO (fear of missing out) in that my portfolio performance this month has been entirely uninspiring even if operationally, companies like Emmerson have outperformed my expectations.

Eurasia Mining (EUA) – Unbelievable gains and volatility

In my previous report, I commented on Eurasia Mining. These shares have experienced vertical lift off in the past week. One of the directors announced what I view to be market sensitive news on the Vox Markets podcast that they’re applying for other licence areas that would take their potential resources up towards 50Moz.

If true, the total sale value of Eurasia’s assets could significantly increase. One question I would have is what confidence category those resources/reserves would be in. Not all resources are equal – the higher the confidence, the higher the value.

Some investors evidently value the company at more than £125 million (at 4 pence per share):

(source: Google Finance)

Whoever paid 4 pence per share thinks Eurasia mining is worth half as much as RockRose Energy, I think that might be optimistic (obviously if a deal comes through it could be a lot more) – it’ll be interesting to see what happens with Eurasia’s share price going forward.

Emmerson (EML) – keeps on getting better

Emmerson is a London main market listed mining company targeting the development of the Khemisset Potash Project in Northern Morroco. I covered Emmerson in detail for Cube earlier last month.

Earlier this week, Emmerson announced a 72% increase in its Mineral Resource Estimate with 70% of the resource upgraded to the higher confidence indicated category.

This is fantastic news for the following reasons:

  1. Higher confidence resource increases the probability of debt funding.
  2. A 70% resource upgrade should substantially increase feasibility study NPV.
  3. A larger resource can support a higher level of production increasing economies of scale. Emmerson states in this week’s RNS that they are “examining the potential for a Phase 2 expansion to increase production by 50%, which would substantially improve economics”.

CEO Haydn Locke discusses the announcement here:

Emmerson Director Ed McDermott stated on Twitter that Emmerson have had unsolicited offers of debt finance which further reinforces my view that the project is likely to get funded.

When I discussed Emmerson last month, I wrote that I viewed now as the opportune moment to get involved with the company. My view has been reinforced by the dramatic increase in resource and I therefore currently view Emmerson shares as the cheapest they’ve ever been based on what I view as a highly financeable mine. Good quality projects like Salt Lake Potash and Emmerson have improving project metrics, while those like Sirius Minerals get worse.

Since I wrote this article, Emmerson shares have drifted back to the share price level prior to the announcement which I view as seriously cheap.

Resolute Mining (RSG) – incredible operational performance

Resolute Mining put out an RNS about their Syama Sulphide Circuit last week. I sold out due to concerns that circuit downtime could materially impact earnings and therefore the balance sheet. My concerns were completely misplaced:

  1. Roaster repair will take 6 weeks, costing $5 million.
  2. The company will offset lost production by using the sulphide circuit carbon in leach (CIL) infrastructure.
  3. 400,000oz guidance maintained – helped by above budgeted performance at Ravenswood in Australia and at Mako in Senegal.

Resolute released its quarterly production report yesterday. Yearly expected All In Sustaining Costs have increased from $960 an ounce to $1020. Thismeans that Resolute will generate about $24 million less ($60 AISC increase * 400,000) in operational earnings than expected. Whilst any reduction in earnings isn’t ideal the way in which Resolute have managed the situation is to be commended. I’ll consider rebuying Resolute shares in the future and look forward to reviewing the quarterly figures.

I3 Energy (I3E)/RockRose Energy (RRE)

RockRose Energy paid the first of what it expects to be regular dividends last week to shareholders. I celebrated this with one of my brothers with a seven course tasting menu and wine flight. What’s the point of making money on the stock market if you don’t enjoy it once in a while?! My parents are also now proud shareholders.

I3 Energy’s announcement earlier in the week has implications for RockRose Energy’s Tain licence; hence my coverage.

I3 Energy is AIM oil & gas exploration company that earlier this week announced the Serenity Oil Discovery in the North Sea. I3 Energy shares have been volatile during the past year: at 39 pence (ask), I3E’s market cap is currently £35 million.

(source: google finance)

I3E have found “preliminary well results that are consistent with i3 Energy’s pre-drill estimate of 197 MMbbls STOIIP for the entire Serenity closure within the Company’s licence area”.

One of I3E’s funding options going forward is a $100m reserve based lending facility which requires successful Liberator drilling results. The drill rig will move towards this after plugging and abandoning the Serenity well. Of interest to me was that GE Baker Hughes accepted over 2 million warrants at 56 pence for payment – they must be very confident to accept warrants at that level which they’ll have to pay over £1 million to exercise!

CEO Majid Shafiq and CFO Graham Heath discussed the result:

I briefly entered into a long spead bet in I3E earlier this week, on the basis that the shares were cheaper than they’d been prior to drilling failure. But I cut my losses when the share price started to move against me as selling dragged the price down.

Serenity and Tain

I3E drilled close to Tain and believe that the Serenity and Tain blocks are connected. RockRose Energy own 50% of Tain. If Serenity and Tain are connected I view this is a positive for both companies as the licences will likely be amalgamated with each party paying their share of the enlarged costs. A possible downside for RockRose may be that it delays development of the Tain field.

Hannam & Partners produced a note on RockRose following the upgrade – I won’t share the link here as I’m not sure whether the note is ‘allowed’ to be circulated. But I’ve seen a copy and will quote one paragraph:

“i3Energy announced a successful exploration well on its Serenity prospect, which is thought to be the westerly extension of the Tain discovery. The Tain project (worth £1.82/sh unrisked; £1.02 risked to RRE) is progressing to a final investment decision in mid-2020, with first oil expected in H1’22.The discovery by i3 could boost the value of Tain, as it means that there maybe cost sharing on the development on of Tain/Serenity and the result could be positive for the western part of the Tain field.”

I’ve seen suggestions that RockRose Energy might attempt to buy I3E – whilst possible, I’d prefer Andrew Austin to focus on deals like the Marathon acquisition which produce transformative returns. Unfortunately I believe that private equity and other groups have cottoned onto RockRose’s strategy, increasing competition for assets. Hopefully, RockRose can use both their cash and strong balance sheet to fund at least one more mega deal, taking them into FTSE 250.

Tain wasn’t due to have a FID (final investment decision) until mid-2020 with first oil due in 2022. Tain was expected to achieve peak production in excess of 3000 bopd which, whilst meaningful to me, is not a concern when the company is valued at near cash in the bank.

Arc Minerals (ARCM) – a commercial producer?!

Arc Minerals is an AIM listed exploration company with gold/copper/cobalt assets in Zambia, the DRC and Slovakia. I covered Arc Minerals about a year ago for Cube; a key component of my investment rational was that Arc Minerals could generate cash flow from its Commercial Scale Demonstration plant. Since then, the cobalt price collapsed and the company’s focus on the CSD plant appeared to become secondary to exploration.

Given this, I was pleased to read yesterday that Arc Minerals had made their “First Commercial Sale and Shipment of Copper Concentrate from Kalaba CSD Plant”. The company has also begun the “initiation of study at Cheyeza East to assess commercial viability of mining high-grade oxide material for processing at Kalaba CSD plant”. Cheyeza East has shown grades exceeding 1 – 2% copper which means that the economics on material mined there could be material for Arc. It’s too early to know exactly what this means in terms of cash flow but as a long term shareholder I’m delighted to that cash flow could be generated and reinvested back into drilling the company’s numerous targets.

Fingers crossed that dramatic gains in some companies during October is a sign that liquidity is returning to the UK stock market and my portfolio may awaken from its slumber next month!

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