Source: The Critical Investor for Streetwise Reports 07/17/2020
The Critical Investor examines the latest news from this junior with a flagship copper-zinc project in Portugal, which also includes finalizing a joint venture with MATSA and preparing for the season’s drill program.
As gold stocks are getting all the attention at the moment, with gold firmly in an upward trend, it seems, one could almost forget the existence of base metal juniors. This is not entirely justified in my opinion as, for example, copper (Cu) has recovered completely from its March lows, as can be seen in this chart per pound Cu by Macrotrends:
A tiny junior whose faith is closely intertwined with copper pricing is Avrupa Minerals Ltd. (AVU:TSX.V; AVPMF:OTC; 8AM:FSE)8, as its flagship Alvalade brownfield copper-zinc project in Portugal is likely to contain significant amounts of the red metal. The other metal, zinc, has recovered as well, and more, but follows a different pattern—as can be seen in this Kitco chart—as it isn’t so directly connected to, for example, Chinese demand fundamentals.
Despite the hype around precious metals, Avrupa managed to land a joint venture (JV) with MATSA (Minas de Aguas Teñidas, S.A., which is owned equally by Trafigura and Mubadala, two giants in the mining investment space) last year. Despite COVID-19, both Avrupa and MATSA worked diligently and quietly on permitting, and managed to recently receive the new Alvalade Experimental Exploitation License (EEL) from the Portuguese Mining Bureau.
Despite the relatively limited delay of about three months due to COVID-19, president and CEO Paul Kuhn was obviously very happy, not in the least as this permit was a very important milestone for the MATSA JV to be finalized: “We are extremely pleased to have the Alvalade 5-year Experimental Exploitation License (EEL) issued to the Joint Venture company, PorMining Lda. With partner MATSA, we will be able to move forward using our joint, long-term Pyrite Belt experience and recent successes to potentially develop a world-class copper-zinc project within the Alvalade license boundaries. We plan to immediately start the necessary work programs leading to the next drill project later this year.”
The CEO of MATSA, Audra Walsh, was also excited, as MATSA is venturing into Portugal for the first time now, after having established itself in neighbor Spain with several operating mines and development projects: “Obtaining the Alvalade exploration license opens up new opportunities for exploration in Portugal. Exploration is one of MATSA’s permanent objectives, as it is our future. The agreement with Avrupa Minerals is the beginning of our exploration in the Portuguese Pyrite Belt”.
The EEL covers an area of approximately 115 square kilometers, is valid for up to five years and includes the Sesmarias massive sulfide discovery, the nearby historic Lousal Mine, the Monte da Bela Vista stockwork zone and a number of other already known massive sulfide targets noted on the map. Avrupa will operate the project through a joint technical committee with full funding by MATSA for up to three years, subject to project milestones.
The market didn’t really seem to grasp the importance of the announcement, although the share price rose from a measly $0.02 to $0.04. Avrupa and MATSA are targeting a large brownfield project, with potential tonnage ranging from 30 to 50Mt. Projects like this could result into net present values (NPVs) of hundreds of millions of dollars very quickly.
Share price; 3-year time frame (Source: Tmxmoney.com)
As MATSA is funding all exploration work, like drilling and establishing resources, money isn’t the issue, as long as the project remains of interest for MATSA, of course. In this case, Alvalade being a brownfield project with a former mine and well-documented historic resources, the risk of proving up sufficient resources doesn’t seem to be a binary risk, like a greenfield exploration JV usually is.
MATSA is very serious about expanding their footprint in the Iberian Belt, and also targets early-stage exploration, besides advanced, lower-risk projects. They received two greenfields exploration licenses at the same time as the Alvalade licence issuance, and a third exploration license is coming. According to CEO Kuhn, they are in it for the long term in Portugal.
As MATSA is funding most costs, Avrupa already received 400,000 euros as part of the earn-in. The first tranche came back in December 2019, and the company has used it to pay bills and operate in a most basic manner, meaning CEO Paul Kuhn has been doing all work by himself, from home whenever possible. With the second tranche, Avrupa continues to operate in a likewise careful manner.
According to Kuhn, by doing this very carefully, without fanfare, they have been able to obtain the coveted Alvalade EEL license during a very difficult time, with the COVID-19 pandemic slowing everything down.
As the health situation in southern Portugal remains fairly open, Avrupa intends to start physical work at Alvalade in the next couple of weeks. They have been meeting with MATSA at the coreshed recently to work out a three-month budget to perform exploration work, predominantly focused on drilling as soon as possible. In the first year of the project, they are required to drill at least 5,000 meters, according to the contract with the mining bureau. Reviewing and re-logging of core is also a vital part of this program, a full list of planned activities follows here (as per company):
- Re-log historic Avrupa-drilled Sesmarias core with MATSA to integrate their knowledge of the Pyrite Belt into the overall understanding of the massive sulfide deposit (remember that they have three operating Pyrite Belt mines in Spain, and at least one new, unannounced discovery in the same rocks).
- Initial logging and possibly sampling of historic core prior to Avrupa’s involvement at Alvalade. They have access to at least 10,000 meters of old core that has not be looked at for years.
- Considering use of ionic leach geochemistry to help identify and follow the trend of the Sesmarias mineralization. This is a relatively new geochemical technique that utilizes ultra-trace detection methods to find ions of many different elements that may indicate the presence of buried massive sulfide mineralization. Some orientation surveys have been done over known mineralization at Sesmarias, and it seems to work quite well.
- Review all of the old Lousal Mine data and geology in order to consider new drill targets. It is reasonable to assume that Lousal and Sesmarias were all part of the same deposit a long time ago. Are there more sulfide lenses out there between Lousal and Sesmarias (7 kilometers apart)? How much more of the remaining Lousal mineralization might be available for exploitation? Possibly 30-35 million metric tonnes of massive sulfide within the old Lousal workings.
- Review old core from the Monte da Bela Vista (MBV) stockwork zone to see where the ore deposit may be hiding. MBV is located 1.5–2 kilometers (2 km) north of Lousal. . .over 9 km of strike length in this district.
- Review the old Caveira Mine data and drilling. Caveira is under-explored and is located only 9.5 km north of Monte da Bela Vista. [Avrupa] only drilled one or two holes in the area when. . .working with Antofagasta years ago.
- Review and compile exploration data for the rest of the license, as there are lots of targets to be explored.
- Drill targeting with the hope of starting drilling by the beginning of September.
Furthermore, MATSA would like to do airborne geophysics over Alvalade and the rest of their new exploration properties in the region. This will probably be done next year to help with drill targeting for Sesmarias and for a number of other anomalies on the license.
For now, Avrupa has to put together a team in the next couple of weeks, find housing and safety equipment, clean out the coresheds, prepare for all the logging, etc. To me, the Sesmarias discovery combined with the Lousal historic resources/workings is the obvious target for MATSA, as it generates a 40–50Mt resource potential (Sesmarias 10 Lense is guesstimated to contain about 19–20Mt, Lousal a potential 20–30Mt, both guesstimated at 1% Cu or better). Avrupa and MATSA are looking to see if Sesmarias, Lousal and also Monte Da Bela Vista, all several kilometers apart from each other, could form a district-scale system.
As a reminder, MATSA will look to have the 51% earn-in and the 85% earn-in completed in those five years. If all continues to go well, Avrupa is fully carried to a production decision for MATSA to earn-in to 85%. That could very well amount to 30–40 million euros (= CA$45–60M) of NPV value for Avrupa. At that point, Avrupa can either choose to get a CA$10M payment for their 15% stake, or fund capex pro rata. As capex of such a project could easily run into a potential $300-500 million range, 15% of this would mean raising $50-80 million, which is almost impossible for a tiny junior like Avrupa.
This can be calculated easily. When a construction decision would be made, Alvalade would have to be at feasibility study (FS) stage and fully permitted. Roughly speaking, in a neutral to bull market sentiment, the enterprise value could be about 35–50% of the FS NPV value of Avrupa’s 15% stake, so about 5–7.5% of FS NPV. This would imply, at a roughly estimated FS NPV of around $500 million, an estimated enterprise value (EV) of $25–37.5 million, which is about CA$32–50 million, which in turn means, without further dilution in the meantime, that the share price hypothetically could hover in the CA$0.29–0.45 per share by then.
Raising $50–80 million or about CA$67–107 million, would mean tripling the outstanding share count if this was done all-equity, and I don’t see this being approved by any board soon. Maybe if they could sell a royalty (the project already has a 5% state royalty) and attract some debt, things could get easier to digest. I would actually prefer renegotiation of terms if metal prices advance further, as CA$10 million in cash seems to equal a rock-bottom scenario for MATSA, calculated on the back of an envelope based on $2.35–2.45 copper and $0.90–1.00 zinc, which seems to be a pretty safe downside scenario floor for them.
So much for my estimates here; let’s look at the plans at hand. According to Kuhn, MATSA works fast and expediently, as demonstrated by their 40Mt Magdalena Mine, which was developed and put into commercial production in less than three years. The JV has 1.2 million euros to work with in the first year. MATSA wants to do airborne geophysics and about 5,000 meters of drilling in the first year. It is estimated by Avrupa management that another 3,000–5,000m of drilling is needed in order to collect sufficient data for a maiden resource estimate. This is planned for H1/2021.
Also, as MATSA has been staking claims in the Pyrite Belt as mentioned, one of them adjacent to Alvalade. They will explore these licenses in their own time, concurrently with work at Alvalade.
CEO Kuhn is also busy with their Slivovo gold project. According to him, Avrupa’s 10% interest was diluted to a 2% net smelter royalty (NSR) last year. Partner Byrnecut International recently exited the project prior to expiration of the Slivovo exploration licenses. By arranging timing on this, in a “drop and apply” procedure, Avrupa was able to apply for the “open” space at exactly the same time as Byrnecut dropped, giving Avrupa the best opportunity to acquire a new seven-year exploration license to cover the Slivovo gold project. The cost of this agreement will be based on successes and milestones as the project advances, starting some two to three years from now. And these costs would be borne by any partner that Avrupa might find to bring the project to mining stage. Avrupa is actively soliciting new partnerships, even as the Kosovo mining bureau decides whether/when to issue a new license for Slivovo.
Conclusion
The granting of the experimental exploitation license is a very important milestone for Avrupa Minerals, as it finalizes the JV with MATSA on the Alvalade project. Now both parties can proceed with exploration on Sesmarias, and verification of the old Lousal workings, which could host reportedly 20-30Mt and potentially more. As with a typical prospect generator, MATSA funds all costs, although Avrupa is the joint venture operator, meaning they don’t have to sit on their hands and be completely dependent on the majority JV partner, which is a good thing as it provides much more transparency.
As Alvalade is potentially a $500 million project, I’m looking forward to milestones like the maiden resource estimate, which would mean a solid first indication of the size of Alvalade.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website www.criticalinvestor.eu, and follow me on Seekingalpha.com, in order to get an email notice of my new articles soon after they are published.
The Critical Investor is a newsletter and comprehensive junior mining platform, providing analysis, blog and newsfeed and all sorts of information about junior mining. The editor is an avid and critical junior mining stock investor from The Netherlands, with an MSc background in construction/project management. Number cruncher at project economics, looking for high quality companies, mostly growth/turnaround/catalyst-driven to avoid too much dependence/influence of long-term commodity pricing/market sentiments, and often looking for long-term deep value. Getting burned in the past himself at junior mining investments by following overly positive sources that more often than not avoided to mention (hidden) risks or critical flaws, The Critical Investor learned his lesson well, and goes a few steps further ever since, providing a fresh, more in-depth, and critical vision on things, hence the name.
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( Companies Mentioned: AVU:TSX.V; AVPMF:OTC; 8AM:FSE,
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