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Strategic Investment Fills Treasury to New Record High

Jack Graham
0 Comments|October 15, 2018

EMX generates US$68M through sale of Russian copper-gold porphyry
 
A strategic investment in a copper-gold porphyry property in Russia has netted royalty generator EMX Royalty Corp (TSX-V, NYSE:EMX) over US$68 million - more than five times the $13 million invested over the past seven years.
 
Vancouver-based EMX first announced the pending sale of Malmyzh in June, then the imminent completion of the deal on Oct. 2, in which Russian Copper Company (RCC) deposited US$200 million into escrow (a third party that holds payment of funds required for two parties in a transaction). The $68+ million is EMX’s portion of the proceeds from the sale.
 
EMX is the largest shareholder of IGC (39% fully diluted), which operates the Malmyzh project in the Russian Far East near the border with China. The 227-square-kilometre property is a joint venture between IGC and US copper giant Freeport-McMoRan. According to EMX, Malmyzh’s porphyry deposits, prospects, and targets occur within a district-scale 16 by 5-kilometre intrusive corridor hidden beneath shallow cover. Mineralization extends from surface or near surface, to greater than 400 to 800 meters of depth.

Over 77,000 meters of diamond drilling has intersected porphyry copper-gold mineralization at 15 targets. Using a 0.3% copper-equivalent cutoff, the open-pit constrained resource (four targets) is estimated to contain 12.45 billion pounds of copper and 9.11 million ounces of gold, or 15.56 billion pounds of copper-equivalent.

Background to the sale

So how did EMX, a relatively small royalty company with a market cap of just $142 million, as of last Friday’s close, come away with such a big injection to their treasury? The genesis of the deal goes back to 2010, when EMX noticed that IG Copper - a Russian-focused explorer - bought a 51% stake in a large land package, putting them in bed with Freeport-McMoRan, which owned the other 49%. At the time, Freeport was downsizing its portfolio but wanted to hang onto its interest in Malmyzh - considered one of the largest undeveloped copper-gold porphyries in the world. In fact, Malmyzh is not one porphyry - a geological term referring to a very large body of uniformly disseminated, bulk mineable mineralization - but a new porphyry “district”.

Sensing a sizable opportunity, EMX jumped in with funding and exploration expertise in which to aid IGC in the advancement of the project. The company’s record speaks for itself. One of EMX’s more profitable investments was in Standard Uranium Inc., which resulted in a $4.7 million realized gain after a successful buy-out of URN in 2006 by Energy Metals Corp. Recent strategic investments include the Malmyzh porphyry copper-gold discovery in Far East Russia, plus Revelo Resources Corp. (TSX-V:RVL) and their portfolio of gold and copper properties in Chile.

Company and business model

EMX via the Prospect Generation business model acquires prospective mineral real estate on a global basis, performs various inexpensive surface or near surface explorations where it hopes to find indications of mineralization or outright mineralization. Once that is achieved, it seeks out a partner to acquire the property, once acquired, EMX is no longer writing any checks related to that specific project, while holding back a royalty on the property. Furthermore, once a property is in a partner’s hands, EMX will receive serial payments including annual property payments, milestone payments, advance royalty payments, and a 10% management fee on any project it manages for the partner.

EMX does augment its organically derived royalty portfolio with royalty acquisitions when they can find them at reasonable pricing valuations. An example of this would the purchase of Leeville Royalty which encompasses portions Newmont Mining’s producing Leeville and Turf mines on the Carlin Trend of Nevada. That asset has earned EMX in excess of US$12 million as of the second quarter of 2018.

The strategy, then, is three-pronged:

1/ Generate early-stage exploration properties, sell them, and retain a royalty. (E.g. Balya in Turkey)
2/ Acquire undervalued royalties. (E.g. the Timok/Cakaru Peki Royalty in Serbia)
3/ Make strategic investments in prospective mineral properties. (E.g. Malmyzh project)

Founded in 2003, EMX has attracted management with both geological prowess and business acumen. The Company employs some of the best geo-technical talent in the world at sleuthing for mineral properties and the business savvy to negotiate highly favorable terms with major, high-calibre partners such as Rio Tinto, Anglo American and South 32. Now investors have an opportunity to join EMX at a time when the risk has been minimized and benefit from its extensive list of current and future producing royalties.

EMX has also has a history of demonstrating fiscal prudence – every capital raise has been completed at a higher share price than every previous raise with the exception of one relatively small raise. This is something noticed by supporter Rick Rule, President and CEO of Sprott US Holdings. His company’s Sprott Resource Lending issued EMX a one-year credit facility for US$5 million.

Another high-powered individual behind EMX is Paul Stephens. The Company’s largest shareholder at 19.5% of shares issued and outstanding, Paul Stephens is chairman of Stephens Investment Management LLC, a hedge fund and venture capital firm. Stephens earned a fortune as a mining industry investor as early-backer to Robert Friedland’s Diamond Fields International - an African diamond explorer turned discoverer of the Voisey’s Bay nickel mine in Newfoundland - Stephens was a leading beneficiary of Vale’s Voisey’s Bay $4+ billion sale to Inco in 1995.

EMX is currently 19.5% owned by Stephens Investment Management, 9.25% by Sprott Global, 8.5% by EMX employees, 5.9% by Newmont Mining, a Zurich based hedge fund owns 5% and 1.9% apiece from Chilean copper producer Antofagasta and Mason Hill Asset Management.

As of August 27, NYSE and TSX Venture-listed EMX had 89,734,540 shares on a fully diluted basis, with a cash position of CAD$6.9 million and CAD$1.4 million in securities.

The Malmyzh deal’s value to shareholders

So how is the sale of the Malmyzh copper-gold property of benefit to EMX shareholders? First, EMX investors can be confident that the buyer is a reputable company. Founded in 2004, RCC is a copper miner and processor that makes copper concentrates, cathodes and rods. Privately held RCC is one of the largest copper producers in Russia; it manages eight mines, several plant facilities in Russia and Kazakhstan, and a trading company. In 2017, it generated 130 billion rubles in revenue, or US$2 billion, notes Exploration Insights, a newsletter run by Brent Cook and Joe Mazumdar - both experts in the field.

Jack1.jpg
*caption: The Kyshtym Copper Electrolytic Plant has undergone a complete retooling, which included modernization of its second anode furnace

Proceeds from the sale of Malmyzh will enhance EMX’s ability to seek out additional royalty and property opportunities as well as assure investors that it will likely never have cause to float any future equity raises.

Moreover, this means the company will have more cash then they have raised cumulatively throughout their fifteen years of operation.  With the $68 million from the Malmyzh sale, EMX will be equipped with over 15 years of run time at its present rate of expenditures.

The capital realized from the transaction (US$68M) will allow EMX to focus on its global portfolio of properties, specifically in the western US, Sweden and Norway.

Multiple sources of income

Both its Sisorta and Akarca precious metals properties are seeing considerable levels of advancement and have a strong chance of reaching production. Sisorta is a 1 by 0.6-kilometre area of shallow, oxidized gold mineralization. The operator, Bahar, has started an Environmental Impact Study (EIS) to obtain a permit to begin construction. If successful, EMX will receive royalty payments in the two to three years, assuming the mine takes a year to build.

EMX holds an unbuyable, uncapped 4% net smelter royalty on the producing Balya, lead-zinc-silver mine. Partner, Dedeman Madencilik, is drilling 24,000 meters to delineate additional mineralization. Highlighted intersections, including 12.75 meters grading 11.39% lead, 5.92% zinc and 225 grams per tonne silver, south of the Hastanetepe zone, suggest the mineralization is continuous.

Along with the aforementioned Leeville Royalty (US$12+ million since acquisition), EMX also has royalties on the Timok copper-gold project in Serbia which is the process of being taken over by Zijin Mining Group - China’s largest gold miner that bettered a hostile bid from Lundin Mining to take over Nevsun Resources.

Conclusion

The recent sale of the Malmyzh copper-gold porphyry district in Russia is a major step in the evolution of EMX Royalty Corp. With the company’s treasury flush with an extra US$68 million, it has now ample cash to explore other royalty opportunities without share dilution. Proceeds from the sale will also allow EMX to easily pay off its $5 million loan from Sprott, thus improving its financial position.

The company’s long-term objective has always been to have steady and sustainable cash flow from its royalty portfolio in order to cover it’s G&A (general and administrative) and exploration costs. Instead, it appears that EMX has met its goal of achieving positive cash flow via the sale of a strategic asset.


About author: Jack Graham has more than 20 years of experience as a writer and editor specializing in Canadian small and micro-cap stocks.



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