The value gap is plain enough.
On the Aim market of the London Stock Exchange Europa Metals is valued at £2.6mln.
Yet, a recently proposed farm-in deal sets the valuation of the company’s Toral zinc asset at US$8mln.
What’s more, that farm-in deal, if it proceeds, means that dilution will no longer be a factor for Europa shareholders.
So, what’s with the discount?
There’s execution risk, of course.
The farm-in, with Canadian-listed Denarius, is still subject to due diligence, and if and when it does get signed off, there’s various phases to the earn-in.
On the other hand, with the pound continuing to test the patience of the currency markets, the gap between £2.6mln and US$4mln looks quite wide, especially since plenty of exploration upside still remains at Toral.
Furthermore, if Denarius does spend an initial US$4mln to take its stake to 51%, it will then be presented with the option to go to an 80% stake in Toral by paying US$2mln in hard cash to Europa.
All of which means that, even if that valuation gap seems fair, there’s a real floor to the Europa share price that wasn’t there before.
It’s not a bad position to be in as the markets move into a period of greater uncertainty, with metals prices weakening on continued covid fears in China and wider global economic woes.
But the Denarius deal hasn’t come out of nowhere.
Europa’s team, led by acting chief executive Myles Campion, have certainly been putting the hard yards in over the past couple of years, working up Toral to a point where a larger operator like Denarius could take a real interest.
A scoping study completed at the end of 2020 showed the project to have a net present value of US$150mln, and operated on the assumption that it would have a 12-year life.
The key development in that study over previous ones was the introduction of ore sorting as a way of making nearer-surface material economic. With that success in hand, Europa then went on to boost the indicated resource to 5.9mln tonnes at 7.1% zinc, and to follow that work up with two further holes drilled this year.
The aim is to use the results from those recent holes to boost the indicated resource still further, and allow the company to look ahead to a conversion to reserves. The signs so far are promising: the first hole returned an intercept of more than three metres at over 15% zinc equivalent. Results from the second hole are expected imminently.
So, it’s all heading in the right direction – to the point where Denarius are willing to come in and stump up an initial US$650,000 to fund a pre-feasibility study, with a view to following on with a further US$3.35mln earmarked for further drilling and an expansion of the project footprint.
The proposed pre-feasibility study should take around six months, according to Campion, and the work undertaken will also go towards an application for a mining licence.
“We aren’t the biggest deposit,” says Campion. “And we aren’t the highest grade, but indications are we have a nice sweet deposit in a great location, with the net present value being very positive and the internal rate of return is over 30%.”
That’s enough to be going on with, especially since the project may yet grow still further, and the economic uplift from ore-sorting could prove significant.
But with Denarius set to make more of the running at Toral, will that then free up Campion and the Europa team for other things?
Campion notes that the proposed deal is staged, so there’s unlikely to be any sudden announcements. On the other hand, though, projects do come across his desk and the company is actively looking at other assets. He isn’t specific about what his ideal project would look like, but he says it’s got to be in a “good jurisdiction.”
Does Spain qualify on that score?
People go back and forth on that question. But Toral is moving ahead, and Denarius hasn’t been afraid to double down there, since it already owns the Lomero Poyatos asset, in Huelva province to the south.
What’s more, Europa has a good Spanish team on hand, built up over time and eminently qualified on several levels. You could do worse that build value in Spain first, as Europa is doing, before casting your eyes up to broader horizons.