Research Update, Arctic Minerals Q2 2021: Higher metal prices adding further potential
13 Sep 2021
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Arctic Minerals’ cash flow and costs in the first half of 2021 corresponded to 40-50 percent of our full year forecast. The prices of the company´s main metals—gold and copper- have risen 3.6 and 11.9 percent respectively since our Initial Coverage Report on 10 March 2021. We adjust our target price for the Arctic Minerals share to SEK 1.06 in our Base case (previously SEK 1.11). This mainly reflect a potential share dilution effect in a new issue in 2022.
A local Nordic mining company focusing on the early stages
Arctic Minerals is a local Nordic mining company exploring early-stage deposits in Fin-land and Norway. Typically, resource drilling is necessary before a project can be valued and sold. The strategy is to divest all or part of these deposits to larger mining companies following the first phases of exploration. The returns for exploration activities are often highest in the early stages.
Burn-rate just under half of our full-year forecasts
Arctic Minerals reported an EBIT of minus SEK 6.3 million for H1 2021. This represents 40 percent of the full-year 2021 guidance we provided in our March 10 Initial Coverage-report of Arctic Minerals. At the same time, cash flow for H1 2021 was around 50 percent of our full-year forecast, minus SEK 13.1 million compared to minus SEK 27.1 million.
The company had a cash position of SEK 26 million as of 30 June 2021, which was roughly in line with our assumptions prior to the Q2 report on 27 August.
4-5% lower target price in Base case, due to share price dilution
It is a challenge to value early mineral exploration companies that do not possess any quantified mineral resources. We use a combination of methods, depending on the asset, to calculate a fair value of SEK 1.06 per share. This could be compared to SEK 1.11 per share in our Initial Coverage report on 10 March 2021. The difference is mainly due to us this time assuming that new issues could be done at a share price of SEK 0.75 in FY 2022 instead of earlier anticipated SEK 1.25 per new issued share. At the same time, the USD has strengthened slightly against the SEK since 10 March, pulling up the value of the company’s mining deposits somewhat in SEK terms.
Our Bear case arrives at SEK 0.41 per share (previously SEK 0.46 per share) while our Bull case land at SEK 1.92 (previously SEK 1.99 per share).
There is an exploration sector risk related to the volatility of mineral prices. Currently though, metal prices have (save silver and palladium) increased since 10 March, making discoveries relatively more attractive for the company.
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