Coverage Initiated on 'Tier-1 Polymetallic Developer in World-Class VMS Camp'

A Clarus Securities report noted Emerita Resources' "IBW project alone offers significant value proposition and mergers and acquisitions appeal," and "a big prize for Emerita will be the awarding of the Aznalcollar [project] public tender."

In a July 23 research report, analyst Varun Arora announced that Clarus Securities initiated coverage on Emerita Resources Corp. (EMO:TSX.V; EMOTF:OTCMKTS; LLJ:FSE) with a Speculative Buy rating and a CA$4.50 per share target price. Today, Emerita is trading at about CA$1.72 per share, at a discount to its peers.

"Emerita offers a rare combination of significantly derisked, world-class polymetallic projects with excellent infrastructure on the Spanish side of the Iberian Pyrite Belt, which is one of the largest volcanogenic massive sulphide mining camps, globally," Arora wrote.

The analyst explained the factors that make Emerita a compelling investment.

One is its Iberian Belt West (IBW) project, which offers "a significant value proposition and mergers and acquisitions (M&A) appeal," Arora wrote. Drilling at IBW could roughly double the historic resource there to about 21,000,000 tonnes (20 Mt). Now, it amounts to about 12 Mt zinc equivalent at a 12.9% grade, carrying a value of about US$4 billion.

Currently, Emerita is in the process of drilling 5,000 meters (5,000m) at IBW's La Infanta deposit, and results are expected soon. The company plans to drill 10,000m at Romanera and 7,000m at El Cura once it receives the necessary environmental approval, then complete a resource estimate update in Q1/22.

"IBW offers a significant resource growth potential and a high-grade development opportunity that could drive a significant rerating of the stock from its current level," Arora commented.

In addition to the upside that IBW provides, Emerita could garner a big boon were it awarded the Aznalcollar project that is currently tied up in the courts. Arora wrote that resolution of this years-long legal dispute is expected this year, and Emerita has a decent chance of prevailing.

Should Emerita be granted Aznalcollar, the company will have two assets likely amenable to underground mining, Arora explained. Per Clarus Securities' calculations, both could eventually produce at a combined rate of 550,000,000-600,000,000 pounds of zinc equivalent per year (75% zinc; 25% copper, silver and gold). Production costs would be in the lowest quartile, and total free cash flow yield would be about US$300 million (US$300M) per year.

Immediately upon receipt of Aznalcollar, should that happen, Emerita would become a takeout target, Arora purported, and potentially be of interest to some majors in the region. Already, Lundin Mining, First Quantum, Glencore, Trafigura and Rio Tinto, for example, have assets in the region.

The addition of Aznalcollar to Emerita also would result in a higher company valuation, Arora pointed out, with as much as CA$225-250M, or CA$1-1.15 per share, being added to its market cap.

"The stock should eventually trade at a premium to peers given the excellent caliber of the assets and the strong M&A appeal," Arora wrote.

Clarus' CA$4.50 per share target price includes Aznalcollar. Without it, the target price is CA$3 per share.

Emerita catalysts to watch for throughout 2021 are a final outcome of the Aznalcollar court case, initial La Infanta drill results, and approval to drill at IBW's Romanera and El Cura deposits, followed by commencement of that work.

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