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Emerita: AZN court date not what was expected, so what

Emerita finally got news on its AZN court date. The court date is set for March 3, 2025. We are just wrapping up 2022, so this 2025 date is a little over 2 years out.

I didn’t expect the date to be so far into the future. Even the management team didn’t expect this: “We are pleased that the Court has provided us with a court date and firm timeline for concluding the Aznalcóllar criminal case. It was a surprise to Emerita that the date was set so far in the future. The Company is consulting with its external Spanish legal counsel to explore whether anything can be done to accelerate the process.” Now I don’t expect much from alternative, so if anything happens we will be pleasantly surprised.

The date being 2 years out is frustrating but we need to really see if this changes anything in the value of the company and EMO winning its AZN case. The 2 year timeline is frustrating and disappointing. Although it doesn’t mean EMO has lost its AZN case. Nor does it mean EMO’s case is flawed. It is just that we will have to wait a bit longer for EMO to win its AZN case and then sell the asset.

EMO still has its IBW asset. The company is finishing the drilling on the La Romanera deposit, starting drilling on El Cura, and working on the resource estimate. We should have the resource estimate on the IBW asset in Q1 ’23 and we will likely be looking to sell that asset once the resource estimate is out. There have been many comparisions of IBW to the recent Matsa asset sale. David Gower has come out and said multiple times that IBW is likely worth more than Matsa.

Lets say IBW is not worth more than Matsa. IBW can easily be sold for $1B. EMO is currently sporting $132M market cap with no debt. So IBW is easily worth multiples of the current market. The short term catalysts are in place and likely we see some re-rate or sale of the IBW asset in 2023.

The other concern I’ve heard is about cash, whether the company has enough cash to complete its drilling program and survive till AZN court decision. The company has said multiple times that the current cash will take the company through its drilling program in IBW and likely through 2023. If we see the sale of IBW in 2023 then the company will have enough cash to easily survive till AZN court case is resolved. If we don’t sell IBW in 2023, a re-rate of EMO valuation is going to happen once the resource estimate is out. So the stock will be at a much higher price where a small dilution to raise cash will not be a big concern to shareholders.

So how do I see EMO getting played out from there?

I think we see a dip in EMO valuation in the coming days. Investors that can’t see the value in IBW and AZN (even if it means waiting 2 years) will sellout at any price. Although I think fundamentally, EMO is doing really well and should really good. We are finishing up the drilling program in La Romanera and starting the program at El Cura. I would expect management to move faster on the drilling on El Cura and any expansion drilling they want to do in La Infanta. The resource estimate in Q1 ’23 will really get investors to take EMO seriously. Most likely the company sells IBW in 2023, creating plenty of cash for operations and additional drilling. The company also has the Nuevo Tintillo (NT) asset that the company will likely drill in 2023. The NT asset is a big upside drilling program, with many drilling targets and huge upside given the location (between AZN and a major Rio Tinto asset) and a size of 25 km. If NT is a success we likely spend 2023 and 2024 proving out NT. If not a success then we wait for 2025 for AZN conclusion.

The macro trend is a huge bullish for commodities. Even waiting for AZN to be resolved and sold in 2-3 time period isn’t a huge negative for me. We could be a few yrs into a large bull commodities market.

I bought my position in EMO in 2021. My thesis was IBW and AZN were really good assets that the market was not valuing correctly. I thought the odds were very good that in a year I would be able to sell out from that position. Now it looks like I will be in it till 2025. So 4-5 years is what I’m looking at as a holding period. The valuation of IBW + AZN is still over $4B. So even over a 4-5 year period, the IRR will be mouth watering.

So I just see the AZN court date as a disappointment but not changing the investment thesis. The value is still there and the buyers of the assets will be there once the court case is resolved. I just see EMO is something that I don’t really have to worry about for a new few years. I just forget about my position for a few years and will wake up again in 2025 to see what is happening.

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