Inital Coverage Arctic Minerals: Dream Team Looking for Another Kevitsa

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Initial Coverage Arctic March 10 2021

Arctic Minerals is a pure play mineral exploration company operating in Finland, where it has three major exploration targets. It has a legacy asset in Norway, the development of which has halted due to political issues. The goal is to sell any discovery after a certain level of development or to sell the whole company. Our base case fair value per share is SEK 1.11.

Leading track record

The main reason to invest in Arctic Minerals is its management and board of directors. They all have a long experience of the sector and the Scandinavian region, most of them 25 years or more. They own 12.8 percent of the company and invested large sums during the last share issue in January 2021. Two of them developed the Kevitsa mine in the early 2000s. Today it is the largest mine in Finland and owned by Boliden. The company’s exploration manager has a worked at GTK for several years (The Geological Survey of Finland) and earlier at Outokumpu Mining Oy. Exploration data can be purchased from GTK at a low cost. Only a handful of persons have an extensive enough knowledge of the GTK and old Outokumpu databases to know what to look for. Additionally, the company owns a large proprietary database of geological exploration in Finland. Thus, the company’s main competitive advantage is its ability to find promising exploration targets at a very low cost. It has experts working on the ground and in business development. Despite its early phase, the company already has a joint venture with Rio Tinto, which is the second largest mining company in the world. This constitutes a validation of the company’s exploration strategy and a testament to the quality of its exploration projects. Finland is considered one of the best countries in the world for mining investments. The region is underexplored. Substantial ore bodies not yet discovered are believed to exist underground.

Conservative valuation

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 per share of SEK 1.11. Our Bear case is SEK 0.46 and Bull case SEK 1.99. Furthermore, the company has a low valuation compared to peers. There is a large potential upside if an important discovery were to be made. There is also a large downside if no minerals are found. There is a sector risk related to the volatility of mineral prices which might make mineral discoveries more or less attractive for a buyer. At the moment, high metal prices and an expected increase in demand make discoveries relatively more attractive.

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