East Asia Minerals Corporation: Big Potential In A Long-Forgotten Name

Summary

• East Asia Minerals Corporation is on the cusp of producing significant cash flow from the smaller of its two Indonesian properties.
• The company has seen its fortunes rise and fall on the back of a much larger gold deposit in Indonesia, but the company is undervalued based on the smaller project.
• The recent stock price increase is warranted as East Asia has de-risked its Sangihe gold project. There is good potential for additional upward price appreciation.
• Three valuation cases are presented for Low, Base and Upside scenarios.
• I recommend that the risk-tolerant investor add East Asia Minerals Corporation to their portfolio at current levels.

Source: August 2020 Investor Presentation

Investment Hypothesis:

East Asia Minerals Corporation (OTCPK:EAIAF) has de-risked the Sangihe gold project, one of its two Indonesian properties and currently trades at a significant discount to expected cash flow in the next 12 months. East Asia may retain rights with respect to its second and much larger Indonesian asset, the Miwah gold project. The company's valuation once reached USD$600m based primarily on the Miwah project. East Asia will begin generating meaningful cash flow from its Sangihe project soon and the investor has essentially a free call option on any value derived from the larger Miwah asset.

East Asia Minerals Corporation: A Long-Forgotten Name

When investors think about mining and Indonesia the name that comes to mind is Freeport-McMoRan (FCX) and its massive Grasberg mine. A much less known name is East Asia Minerals Corporation. East Asia has a long and checkered history. In 2010/2011 its valuation soared due to its Miwah gold deposit in Indonesia, which has potential for 10 million+ ounces of gold. Details are not 100% clear, but my understanding is that due to deforestation rules in Indonesia the project was suspended, and the company's prospects and valuation went into significant decline. The company has not paid taxes due on the property for 4+ years and the rights to the claim are complicated and need to be re-secured from the government.

This stock chart depicts the dramatic drop from a market cap of $600m to approximately $28m today.

Source: Stock Quote Fidelity.com

More recently, the stock price has been moving upward on increasing volumes as positive news flow regarding its Sangihe project began to come forward.

Source: Stock Quote Fidelity.com

In fact, the share price of East Asia has almost doubled in 3 months' time. There is good reason for the price movement which is highlighted in the discussion about the Sangihe project further below.

Management Change

In 2017, Terry Filbert came in as CEO of the company to try to extract value from the assets. Mr. Filbert is not a geologist but an entrepreneur with extensive experience in Indonesia and with mining assets. My assessment is that he is a cash flow-focused executive with a lot of skin in the game and a practical approach to safely maximizing the value of East Asia. This recorded interview is a very good introduction to East Asia and Mr. Filbert.

Capital Structure

Shares Outstanding (August 2020)	104,161,699
Options/Warrants (August 2020)	53,565,099
Palisades Corp Shares (Sept. 2020)	26,666,666
Palisades Corp Warrants (Sept. 2020)	26,666,666
Fully Diluted Shares Outstanding	211,060,130
Current Share Price 9/14/2020	$0.135
Market Capitalization	$28,493,118

Click to enlarge

*Source Author's calculation from company documents

Please note the September 10^th private placement of shares with Palisades Goldcorp. added ~53m fully diluted shares to this structure.

The 26.6 million of Palisades Warrants have a three-year term (September 2023) and are convertible at a share price of CAD$0.25 (current Canadian price is $0.175 at 9/14/2020). The remaining 53,565,099 of Options and Warrants are in the money and I expect that they will be exercised.

In addition to Palisades' 53.3m diluted shares, Sprott USA (formerly Tocqueville Gold) owns about 22.3m fully diluted shares.

Indonesian Assets - Smaller is Better?

East Asia has two major gold projects in Indonesia. The much larger and well-known project is called Miwah and the smaller one is called Sangihe.

Miwah

The Miwah gold project was the key asset for East Asia in the past and the reason the company was once valued at $600m. Here are some facts that give a sense of the project.

• 3,140,000 million oz Au Inferred Resource (NI 43-101, 2011).
• There has been over $20m spent in the past on development of the project.
• Informal estimates of potential for 10,000,000 Au ounces for the total project.
• East Asia has an agreement with Sprott Financial Partners (a major shareholder) to identify financial partners to secure the project.
• The project was suspended by the government due to a deforestation moratorium. My understanding is that the company has a potential solution via the purchase of carbon credits.
• The company has not paid land taxes due on the property for 4+ years and thus the company's claim to the property is not secure.

Sangihe

Here is an overview of key points regarding the Sangihe gold project which is the key to this investment thesis. I'll start by saying that the project has been significantly de-risked in recent days as the government approved its environmental permit and it received $4m in financing in exchange for shares from Palisades Goldcorp. There is still the remaining step of production approval which appears imminent.

• The 2017 NI-43-101 Report shows 219,700 equivalent ounces of gold indicated and inferred.
• Previous 2011 NI-43-101 reported 840,000 equivalent gold ounces indicated and inferred.
• East Asia owns 70% of PT. Tambang Mas Sangihe which holds a Contract of Works (CoW). If East Asia begins production in 2020 then the CoW will be valid until 2050. The CoW also includes a refinery and export license.
• The company expects to begin producing ~1,000 ounces of gold per month within 6 months of grant of production license and ~2,000 ounces Au per month in about 12 months after initial production.

Valuation

For Baseline valuation I will assess East Asia as a relatively high-risk investment using only the Sangihe asset and associated cash flows. For Sangihe, this does not account for potential upside from additional expansion and exploration. It also does not assign value to any other assets owned by East Asia. I also present a "Miwah Value Add" scenario, whereby East Asia could realize some value for the Miwah gold project in the future. The only variable will be price of gold and results are presented in summary fashion.

Assumptions:

Gold Price: $1,500 (Low Case), $1,800 (Base Case), $2,500 (Upside Case)

All-In Sustaining Costs: $700 (as detailed by the company, incl. govt. royalties)

Production: 2,000 oz of gold per month (expected within 12 months)

% Ownership: 70% (this represents East Asia's % of the company that holds the CoW for Sangihe)

Market Valuation Assumption: 5x annual cash flow

Baseline Valuation Scenarios:

	Scenario
	Low	Base	Upside
Au Price	$1,500	$1,800	$2,500
AISC	-$700	-$700	-$700
Cash Flow	800	1100	1800
Production	24,000	24,000	24,000
Cash Flow	$19,200,000	$26,400,000	$43,200,000
Ownership %	70%	70%	70%
Total Cash Flow	$13,440,000	$18,480,000	$30,240,000
Mkt. Cash Flow Multiple	5	5	5
Value of Company	$67,200,000	$92,400,000	$151,200,000
# of Shares Outstanding	211,060,130	211,060,130	211,060,130
Implied Share Price	$0.32	$0.44	$0.72
Current Share Price	$0.135	$0.135	$0.135
Potential Upside	136%	224%	431%

Click to enlarge

Building upon the baseline assumptions above, here are scenarios that add some value for the monetization of the Miwah gold project.

Miwah Value Add Scenarios

	Scenario
	Low	Base	Upside
Value of Company	$67,200,000	$92,400,000	$151,200,000
Miwah Value	25,000,000	50,000,000	100,000,000
Total Value with Miwah	$92,200,000	$142,400,000	$251,200,000
# of Shares Outstanding	211,060,130	211,060,130	211,060,130
Implied Share Price	$0.44	$0.67	$1.19
Current Share Price	$0.135	$0.135	$0.135
Potential Upside	224%	400%	782%

Click to enlarge

As you can see, the potential returns here are significant, particularly in a rising gold price environment. I will add that the numbers are conservative in terms of the potential monthly production out of Sangihe and even the potential value for Miwah.

Risks

East Asia Minerals Corporation is not without risk. Here are some of the risks that could affect the valuation:

• If the production license for Sangihe were not granted, the valuation of East Asia would likely drop significantly.
• The price of gold could fall below my "low case" which would negatively impact the valuation.
• The market may not be willing to pay 5x cash flow multiple for a junior mining stock.
• East Asia is a junior miner traded on the US OTC market and subject to significant volatility.
• The government of Indonesia could require East Asia to pay a larger portion of its cash flow as taxes and/or restrict export of gold.

Conclusion:

East Asia Minerals Corporation is a potential high return play on a long-neglected junior gold miner. The recent developments at its Sangihe gold project have set the company on a course to begin producing significant cash flow quickly. I recommend that risk-tolerant investors add East Asia to their portfolio.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long EAIAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Please do your own research before making any investment decision. Opinion expressed is that of the author only.

Comments

[bazooooka]

@Crowd Noise Fundamentals What caused the 2017 spike and do you expect similar again?

What is the effective/tradable float on this name and will warrant overhang suppress the price for awhile?

[Crowd Noise Fundamentals]

My understanding is that in 2017 a large investor took a position in East Asia and that buying activity drove the price up. When they exited the price was depressed.

The effective tradable float assuming that Insiders, Pallisades, Sprott, and one other large investor do not sell shares is just under 40% or about 80m shares. Mind you most of that volume is on the TSX.V. The average 90 day volume on US OTC market is about 160k over the last 90 days.

The warrant overhang is a double edged sword. Obviously dilution is bad ,however, a lot of the recent warrant dilution is the result of financing they've received to jump start the Sangihe project. I tried to account for the full dilution above in my capitalization chart above but there is a bit more as the recent financing was increased slightly. The price at the moment seems to reflect some of the concern you are asking about and maybe there is a better entry point possible. Much will be dependent upon final approval of the production and export license as well as the price of gold. The new warrants are priced at $0.25 CDN or ~$0.1875 per share so significantly higher than here before dilution takes place.

These are great questions and certainly reason to be cautious and/or patient with any purchase of East Asia stock. I appreciate the comment and questions.

[Mlp123]

Is this low risk like $gtx Lol

[nicocrema1977]

Buying next week. Huge potential

[Crowd Noise Fundamentals]

@nicocrema1977 I believe there is big upside potential and business case is straightforward. There is ,of course , some risk but potential return is very compelling. Good luck and thanks for the comment.

[Mlp123]

@Crowd Noise Fundamentals is this company low risk like $gtx ? What other low risk bankruptcy plays do you have in mind ?

[Crowd Noise Fundamentals]

I didn’t say East Asia is low risk. Laid out the business case and also the risks. In a favorable gold price scenario there is significant cash flow potential relative to the current valuation. It’s is microcap primarily traded on Vancouver stock exchange with a checkered past so there is risk. My view on GTX is that management prioritized all other stakeholders above existing Shareholders.