1. Introduction
As Avrupa
Minerals Ltd. (AVU:TSX.V; AVPMF:OTC: 8AM:FSE) was experiencing delays in
finalizing its option agreement on its Portuguese projects with a major
copper producer, time was running out on one of its most important claims. A
certain amount of exploration work had to be completed on its flagship
project Alvalade by the end of 2018, so Avrupa decided to raise the necessary
cash on its own, in order to initiate the intended drill program. Although
the share price resides at all time low levels, which means dilution is at
its worst, the amount and share structure allow for this, and this is
actually a blessing in disguise in my view. It is the first time that Avrupa,
always a classic, full-on prospect generator, turns towards a hybrid
prospector generator model, instead of relying on JV partner paying for most
of the expenses.
The classic prospect generator model is a relatively risk- and
dilution-free way of operating exploration projects, but on the other hand a
prospect generator needs a very successful discovery before investors reward
it with substantial share price appreciation, and most of the time the agenda
of the majority JV partner isn't aligned with the minority junior and its
shareholders. On top of that it is often very difficult to determine the
value of a minority share of such a project as it is controlled and defined
(internal resource estimates, studies, etc.) by an outside party. With Alvito
coming back and Alvalade being drilled now, Avrupa outright owns 100% of both
projects, and gets to benefit in full when drilling provides positive
outcomes.
If this is the case, the company might raise more money at hopefully higher
share prices, and advance things even further by itself. Personally I prefer
this scenario as it provides the possibility for a real multi-bagger,
considering the current market cap and share structure. This hybrid prospect
generator model with some self financing of flagship projects was also the
very reason for me to finally start covering Avrupa, as I am not a big fan of
pure-play prospect generators, considering reasons mentioned above. In this
analysis I will discuss the potential of its projects, and potential impact
on valuation if things go as planned.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in U.S. dollars, unless stated otherwise.
2. The company
Avrupa Minerals is a Canadian exploration and development company focused
on creating shareholder value through advancing base metal projects in
Europe. The company model is a modified prospect generator model, as
management decided to finance and drill its flagship project, Alvalade,
itself. Avrupa's most important projects, Alvalade and Alvito, are located in
south Portugal. Alvalade is located in the prospective Iberian Pyrite Belt
(IPB), the largest iron/copper/zinc massive sulfide belt in the world. The
Alvito Project is located in the adjacent Ossa Morena Zone, and the target
there is an iron oxide-copper-gold deposit.
The company has two more projects in Portugal, which ranks 11 out of 91
for the Policy Perception Index (PPI) according to the most recent Fraser
Institute Survey of Mining Companies. The PPI is the most important figure of
this survey, as it indicates the mining friendliness of a jurisdiction, which
encompasses corruption, permitting, speed of administrative processing,
politics, local sentiment, etc. Besides Portugal, Avrupa also has two
exploration projects in Kosovo and one in Germany, and has reviewed a few
Moroccan copper prospects.
The management team has industry veteran CEO Paul Kuhn at the helm, who,
as a geologist, has several decades of experience ranging from exploration to
production. He has been exploring for gold, silver, base metals, uranium and
phosphate, and has been involved in several significant discoveries,
including polymetallic, gold and copper-gold deposits in Turkey, of which the
most significant ones were Tac, Corak and Cöpler (now owned by Alacer Gold).
Kuhn was also the CEO of the former owner of the Portuguese projects now
owned by Avrupa, and came over in 2010 when Avrupa bought these projects.
Another key figure is Executive Chairman Mark Brown who founded Avrupa
Minerals in 2008, as president of Pacific Opportunity Capital, his family
fund, which is basically an incubator for many junior mining companies. Its
most successful exit was Rare Element Resources. Brown was the CFO of Miramar
Mining and Eldorado Gold before he joined his father, John Brown, to build
out Pacific Opportunity Capital. He is the largest shareholder with 13.4
million shares (13% of O/S) and regularly supports the stock at lows.
Avrupa Minerals has its main listing on the main board of the TSX Venture,
where it's trading with AVU.V as its ticker symbol. With an average volume of
about 101,524 shares per day, the company's trading pattern is reasonably
liquid at the moment, and I expect this to improve when drilling results will
start to come in during Q1, 2019.
The company currently has 93.8 million shares outstanding (fully diluted
152.1 million), 41 million warrants (the majority is due @C$0.15 or more, of
which 23.6 million warrants are expiring on July 4, 2019, and July 12, 2020)
and several option series to the tune of 7.3 million options in total, the
majority priced at C$0.10 and expiring from July 15, 2020 onwards. Avrupa
sports a tiny market capitalization of C$5.16 million based on the December
21 share price of C$0.055. The company is basically controlled by management,
as 46% is held closely by management, Board of Directors and insiders. When
the current C$1.5 million financing @C$0.05 with a full warrant will be
closed, which is expected in the next weeks, Avrupa will have a working
capital position of about C$1.4 million. A first tranche of C$0.5 million was
already closed at November 9, 2018.
Share price; 3 year time
frame
As can be seen in the chart, the current financing had a big impact on the
share price, as interested parties for the full warrant routinely sell their
shares when they hear of an upcoming capital raise in order to buy back lower
into the financing, and get the coveted warrants for free. Other factors not
helping Avrupa were news about the JV partner giving up on Alvito,
deteriorating general mining sentiment, and tax loss selling which usually
peaks mid-December. All things considered, it seems the share price has
bottomed, and I view these levels as an excellent buying opportunity as I
will elaborate on this later on.
3. The hybrid prospect generator model
Avrupa Minerals uses a hybrid prospect generator model as mentioned, after
it used a pure prospect generator model since inception. The business model
of a prospect generator consists of buying or optioning exploration projects
at an early stage or even with a historical resource, do first stages of
exploration before drilling, and try to joint venture with much larger
companies, usually producers, in order to have the intended drill program
financed by these larger companies. There is never a free lunch, so the
prospect generator usually ends up as a minority JV partner, surrendering
most of the project in return. I called it a hybrid as Avrupa decided to raise
money and drill Alvalade itself, as the company had to spend a certain amount
of exploration dollars (in this case Euros) within a certain timeframe.
This can still be a very profitable business for a junior when advancing a
project into a resource could be successful, as we have seen with, for
example, Reservoir Minerals at Timok. Reservoir held on to a pretty big stake
in Timok along the way, but in most cases the junior converts into a 10–20%
minority JV partner, or this small stake gets converted into a royalty. If
exploration programs are not providing the desired success for the majority
partner, the project often returns completely to the minority partner again,
as a "tested and killed" opportunity. But often this doesn't have
to mean that the project is worthless, as the stakes for a major are often
much higher before it moves needles for them. A junior could very well still
generate a company-building flagship asset out of such a drilled project,
which could attract medium-sized producers instead of majors with high
demands.
There are some advantages and disadvantages to the prospect generator
model. In favor of this model is the spread-out risk over an entire portfolio
of exploration projects, usually between three to five active at the same time,
compared to the usual single asset juniors, which have much more binary
outcomes from drill programs. The budgets are provided by the majority
partners in the JVs, which prevents more dilution when raising money by the
junior itself.
Avrupa management estimates that 65% of all exploration and claim holding
costs since 2011 are financed by the majority partners throughout, so it had
to raise about 35% itself, which helps the share structure meaningfully, of
course. This percentage of self-financing was lowered even further to about
20% for 2018 according to management, but will rise of course again as the
company financed the current drill program of Alvalade by itself. Investors
in prospect generators are usually long-term investors, as there is no quick
buck to be made. On the other hand, there isn't as much downside like with a
single asset junior as well, when a drill program on the first project
doesn't indicate a future deposit.
The most important disadvantage for a prospect generator is the difficulty
of the valuation of the company for investors. On top of this, the junior is
always dependent on the majority JV partner regarding determining drill
programs, timelines, reports and continuation of the JV. The interests of the
junior are not always aligned with the majority partner's interests as well.
Sometimes the majority partner has reasons to keep drilling success or a
resource or economic profitability as limited as possible, sometimes even
below agreed terms on thresholds, etc., so in case of a buyout it has to pay
the junior as little as possible.
Besides all this, a key aspect of good prospect generator management is
the necessary ability to identify eligible projects and find majority
partners for them. In other words they have to be excellent geologists and
networkers. Considering the fact that Avrupa has been able to do
exploration/drilling programs consistently since 2011 with large JV partners,
it seems it fits the bill just nicely in this regard.
4. Projects
As mentioned earlier, Avrupa Minerals has a portfolio of projects in
Europe, to be more specific in Germany, Kosovo and Portugal, and is working
on things in Morocco, but the focus is clearly in Portugal at the moment, so
I will predominantly discuss these projects.
The project in Germany called Erzgebirge is a very early stage
gold-tungsten JV project, and currently shelved. I am not sure if any new
serious mining outside the current brown coal mines have any chance of
succeeding in Germany, as mining sentiment in this country is very negative
according to German mining executives managing Canada-listed companies I know
who have no agenda in this whatsoever. The company had this project reviewed
by a German engineering firm before it acquired the project, and told me this
firm noticed no such issues. Notwithstanding this, as a Dutchman living less
than 100km away from the German border, I can relate to this negative
sentiment towards mining or any large-scale landscape disturbance or
industrial activity, and wouldn't expect too much from this project.
The Slivovo project in Kosovo was the former flagship project of Avrupa,
before Alvalade. This small 99 koz @4.8g/t gold project is in the end stage
of a typical prospect generator cycle, as the majority JV partner Byrnecut
owns very close to 90% of the project now. It completed a PFS study, but the
results of this are not public. As soon as Byrnecut reaches this 90%
threshold, Avrupa's interest in the project will be converted automatically
into a 2% NSR royalty. At the moment Byrnecut is in the process of selling
Slivovo, which would imply a welcome cash infusion for Avrupa.
Avrupa Minerals owns huge land packages in Portugal, amounting to 1,475
km2 in total (after mandatory size reductions), consisting of flagship project
Alvalade, Marateca, Mertola and Alvito. With these claims, Avrupa controls a
significant part of the Iberian Pyrite Belt (IPB) in Portugal. The white
colored areas on the map above represent the IPB. The IPB is the largest of
its kind in the world for massive sulfides, as this table shows:
A refinement of the last map shows several trends within the IPB:
The flagship Alvalade claims are shown in red, and are part of the
Aljustrel Trend and Neves Corvo Trend. If we zoom in even more, we see the
other licenses of Avrupa in Portugal on the IPB:
Avrupa Minerals signed a non-binding LOI with a large North American base
metal producer in March 2018, in order to option out Alvalade, Marateca and
Mertola. This producer can earn in 51% on all projects by spending about C$20
million over three years. The majority of this, C$15 million, will be spent
on Alvalade, a copper-zinc VMS project, involving exploration and drilling,
and after this period the producer would have to produce a Feasibility Study
before 2024, for another 24% on Alvalade. However, the finalization has been
delayed so far without a clear outlook on an agreement, but significant
exploration funding has to be completed before the end of Q4 2018 in the case
of Alvalade, and Q2 2019 in the case of Mertola, to keep the claims in good
standing, (to the tune of C$750K for Alvalade and C$600K for Mertola). So
Avrupa management decided to raise its own cash and started drilling of its
own at Alvalade.
The potential partner has to spend less on Marateca (C$3 million over the
first two years) and Mertola (C$1.5 million before 2020). On a side note: in
Portugal every mining project is subject to a 3% NSR, in addition to
corporate taxes of 21%.
The Alvito IOCG (iron ore, copper, gold) project, which was part of a JV
with OZ Minerals, was returned to Avrupa in October 2018 after the 2018 drill
program wasn't successful enough for the majority partner, generating
low-grade (0.10-0.20% Cu) copper intercepts. However, Avrupa did identify a
20 km2 area within the 300 km2 license that appears to have good potential
for a copper-gold deposit. Enough work has been done to keep the claims in
good standing during 2019, so Avrupa can search for a new JV partner without
being in a hurry.
The most interesting projects are Alvalade and Mertola, as both contain
former mines with historical resources. Avrupa sees an opportunity to review
these past-producing mines along the lines of the Aljustrel story: a
metamorphosis from a defunct pyrite mine to a world-class polymetallic mine.
Another pillar of its strategy is the application of a modern era exploration
model to an old district, repeating the Neves Corvo (operating copper-zinc
mine of Lundin, 70km away) story, which already resulted in discoveries at
Sesmarias and Monte da Bela Vista.
The Alvalade project consists out of two formerly producing mines, Lousal
and Caveira, and two exploration targets: Sesmarias and Monte da Bela Vista.
All have seen sampling and drilling in the recent past, and the massive
sulfide discovery at Sesmarias, about 7 km away from Lousal, is the current
focus of management, as it believes it could be an extension of the nearby
reclaimed Lousal mine, which, for now, is a mining museum.
Former Lousal Mine
This former mine produced gold and silver from pyrite ore, and historical
data indicates that only 15–20Mt of mineralized material has been mined of a
total estimated orebody of about 50Mt. Besides the gold and silver, this
deposit reportedly contains 0.7% Cu, 1.4% Zn and a bit of lead (Pb), which
could point towards a possibly economic deposit of 30–35Mt according to
management. The Lousal mine is situated on the Alvalade license. The museum
is owned by the Lousal Foundation, and the government has provided funding
and support for a remediation project there. However, this foundation is open
to discussion about exploration in/around the mine area. The next phase of
work would include verification and upgrade of the deposit.
Avrupa had an mining engineer do a cursory informal study, which indicated
an economic project at current metal prices with a 50Mt, 20 year LOM,
2–2.5Mt/year underground mine at a grade of 2% CuEq, and a capex of US$800–850
million. No NPV or IRR numbers were disclosed by management. According to
management, it is important to note that the mine produced only iron sulfide
(pyrite) for the business of sulfuric acid production for the fertilizer
industry during the 20th century, and was never explored for
copper and zinc "impurities." Management expects that exploration
for copper and zinc within the iron sulfide mass will be instrumental in
upgrading the deposit.
For now, Avrupa intends to prove up an estimated target of 20–25Mt @
2%CuEq for starters.
On a side note, with stories like this I am immediately interested in
knowing what happened to the copper and zinc in the historically processed
ore, as they were only looking for iron sulfides at the time. According to
management, some copper and zinc was undoubtedly extracted at the smelter,
but miners mined away from higher grade copper and zinc areas in the mine.
The Alvalade project has been optioned out twice by Avrupa, to Antofagasta
and Colt Resources. Antofagasta returned it as it didn't meet its thresholds,
although it discovered Sesmarias, and Colt went bankrupt.
The other project that has a historical resource estimate is the Mertola
copper/zinc project. The closed Sao Domingo mine reportedly has a historical
resource of 27–30Mt @1.25% Cu, 3.0% Zn and 1.0% Pb, which is about 2.5% CuEq,
contained in a single sulfide lens, unusual for the IPB, as normally there
are more lenses. Therefore, the company will design an exploration and
drilling program to search for them.
Sampling between Caveira and Lousal indicates that there might be a
continuous, prospective mineralized zone in the Pyrite Belt rocks. This is a
high priority exploration target for management.
The company has apparently lots of targets to choose from, but after close
examination of data it picked the Sesmarias target to delineate further
first.
5. Sesmarias Exploration
Avrupa Minerals has started drilling very recently at Sesmarias. Targets
were based on drill/sampling results generated by the two earlier JVs
involving Antofagasta and Colt Resources. Management distinguished four
distinctive target zones, which are indicated on this map:
As the blue lines are fault lines, it will be clear that a structural
logic of displaced zones can be conceptualized, but it will take a larger
amount of drilling to determine/define these mineralized zones. The target
zones are described by the company like this:
- Eastern Basin – Off-hole EM conductor suggests steeply
dipping massive sulfide target.
- Southern Offset – The displacement of the SES010 massive
sulfide body; target constrained geologically by previous drilling.
- Western Syncline – Structural and geophysical target;
western limb of Sesmarias anticline rolls over into a syncline under
younger rocks and further to the west an anticline which is
"exposed" by magnetic anomaly: thus a repeat of mineralized section.
- Northern Deep – Historical drilling along a NE-SW fence
shows increasing thickness and grade of semi-massive to massive sulfide
material at depth; known sulfides lie in proper stratigraphic horizon,
but have never been tested at depth.
Drilling by Antofagasta outlined mineralized zones with several economic
polymetallic intercepts, mostly dominated by copper. Highlights of this
program looked like this:
- SES002 – 10.85 meters @ 1.81% Cu; 75.27 ppm Ag;
2.57% Pb; 4.38% Zn; 0.13% Sn
- SES006 – 1.5 meters @ 1.66% Cu; 54 ppm Ag; 2.30%
Pb; 3.66% Zn; 0.091% Sn – mineralization cut off by faulting
- SES008 – 5.0 meters @ 0.64% Cu; 36.8 ppm Ag;
0.94% Pb; 1.54% Zn – mineralization cut off by faulting
- SES009 – 2.3 meters of massive pyrite (not
analyzed)
- SES010 – 57.85 meters @ 0.45 g/t Au; 25.1 g/t Ag;
0.32% Cu; 0.61% Pb; 1.95% Zn
Delineation of a resource is not very easy in this area yet, as the
geology is interfered by lots of faults, as can be seen here in this
hand-drawn map by the company geologists (dotted lines are faults, small
crosses are diamond drill holes, squares are sample locations, I added all
the colored items):
This program resulted in the interpretation of two mineralized conceptual
lenses, discovered by SES002 and SES010, indicated on the map in dark green.
The Colt JV resulted in the SES010 lens having a longer strike length to the
north (about 400m long, 175m deep and 25–30m wide), based on a few solid
assays:
This lens alone already would generate 400 x 30 x 175m = 2.1M m3, at a
gravity of 4.0t/m3 for massive sulfides this could result into 8.4Mt @ 1.7%
CuEq, which is a decent start. According to the map and to CEO Paul Kuhn, he
sees potential for a 2km mineralized strike length, and there might be more
as an off-set at SES002. If these zones are continuously mineralized as the
400m zone, Avrupa is looking at 25-50Mt @1.5-1.7% CuEq. As this is a VMS
zone, chances are that there are more mineralized bodies, as they typically
appear in clusters. Other features of VMS deposits are the location of copper
near the feeder structure and zinc farther away from the copper zones, and
smaller deposits near surface when larger deposits can extend to great
depths.
The company is using exploration techniques I didn't know before, among
those are the mise-a-la-masse (MALM) geophysical survey, which is an
electrical downhole scan, and the ionic leach geochemical method, which is a
cheap sampling method but much more sensitive compared to usual soil
sampling, as it measures metal gas ions. So far the MALM scan indicated a
300m long anomaly along the SES010 lens, past drill hole SES022, which it is
drilling now at 150m step-out increments along strike to the northwest.
Drilling has started 150 meters past SES022. Avrupa is planning the same for
the zone starting at SES008, drilling step-outs to the north and south from
there.
Management is planning to drill Monte da Bela Vista after this, and it
thinks this could be the feeder system of it all at depth. The following map
gives an indication of location and size of this target:
In red is visible what management perceives as the potential remaining
resource of Lousal. As can be seen, the Monte da Bela Vista targets are
substantial on their own as well. A drill program is currently being designed
and will be executed after drilling is completed at Sesmarias, time and
funding permitting. The program has to be completed by mid-January.
6. Conclusion
Avrupa Minerals has finally decided not to be completely dependent on JV
partners anymore, as the current JV deal takes too long to finalize, and
would jeopardize the good standing of its flagship Alvalade. C$0.5 million is
already raised, another C$1 million is planned to close soon. The targets that
are going to be explored in Portugal aren't small so a lot of cash is needed,
and management is aiming at nothing less than finding a replica of the nearby
Aljustrel deposit, which is successfully being mined for base metals at the
moment.
Avrupa has several options to emulate this, and it is starting out by
drilling Sesmarias, which could be the missing half of the next door former
Lousal Mine. If the company succeeds in defining a 20+ Mt @ 2%CuEq resource,
which should be economic according to management and a rather large project
for a tiny junior like Avrupa, a re-rating could be a very real possibility.
Especially since the markets are suffering from tax-loss selling at the
moment, sending lots of stocks to 52-week lows like Avrupa, it looks like a very
interesting buying opportunity.
And finally, have a Merry Christmas and a Happy New Year!
Alvito project
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,
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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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