Mkango Resources (MKA) – Fully-funded to explore for magnets

Mkango Resources (MKA) – Fully-funded to explore for magnets

Mkango Resources is an AIM/TSX listed exploration company with assets in the Republic of Malawi. Its primary asset is the 80%-owned Songwe Hill Rare Earth Element (‘REE’) project (latest share price: 9.2p ask, market cap £10 million).

(Source: Google)

Rare Earth Elements

Rare Earth Elements (RREs) are one of seventeen elements in the periodic table. They have a number of uses, including as magnets! Permanent magnets are used in electric car motors and wind turbines. Mkango’s resource contains a high concentration of REE magnets – over 80% of basket value is attributable to magnet RREs (see the table later in this article).

China controls over 80% of the REE market. I predict this will reduce as China increasingly turns its attention to environmental issues and has been clamping down on harmful production where it previously turned a blind eye.

If the trend towards renewables and electrification continues, the demand for permanent magnets should increase.

However, it takes time for increased demand to stimulate increased supply. In the meanwhile, the related commodity prices could increase dramatically, feeding through to excellent shareholder returns. See vanadium/Bushveld Minerals (BMN) for an example of what a tightening market can do to prices.

Songwe Hill

(Source: Mkango)

Mkango is currently in the process of updating the Songwe Resource.

Recent drill results have been successful. CEO William Dawes:

“This is another excellent set of results from the now completed drilling programme at Songwe, which further demonstrates broad mineralised zones with continuity of mineralisation, and will underpin the resource update. The latter will commence on receipt of the assay results from the remaining 21 drill holes yet to be announced.” (RNS).

Mkango completed an updated feasability study in 2015 with the following results:

Evaluation Nominal discount rate1 Real discount rate November 2015
Pre-Feasibility Study
Base Case
Pricing Post tax
NPV US$m
November 2015
Pre-Feasibility Study
Scenario 3
Pricing Post tax
NPV US$m
November 2015
Pre-Feasibility Study
Scenario 2
Pricing Post tax
NPV US$m
Base case 9.0% 6.3% 385 258 446
10.0% 7.3% 345 228 400
11.0% 8.3% 308 201 359
12.0% 9.3% 276 177 323
13.0% 10.2% 248 156 290
14.0% 11.2% 222 137 261
Nominal internal rate of return 37% 29%
Real internal rate of return 33% 26% 36%
Long term basket value assumption (US$/kg) 59.8 52.0 63.8
% of basket value attributable to “Magnet” rare earths2 83% 84% 82%
  1. Includes inflation at 2.5 per cent.
  2. “Magnet” rare earths are assumed to neodymium, praseodymium, dysprosium and terbium

(Source: Mkango website)

Given the successful drill campaign I expect life of mine, production rates and NPV to all increase.

Talaxis tie up – funding through bankable feasability study

Mkango has sold 20% of Songwe Hill for £5 million pounds to Talaxis (part of Noble group). These are the funds which are being used to update the resource. Upon completion Mkango will receive another £7 million, in return for a futher 29% equity stake, which will be used to fund the bankable feasability study. Talaxis has the option to acquire another 26% interest in the project in return for arranging funding for 100% of development. Were this to occur, Mkango would be left with a 26% project stake and free carry (RNS).

Director holdings

Like other dual-listed companies I’ve looked at, Mkango doesn’t clearly list director holdings on its website. The truth is that management own just over 5% of shares. Non-executive Chairmen Derek Linfield owns 1.6%, Co-founders William Dawes and Alexander Lemon each own 2%.

I do prefer to see larger management holdings than this.

Also of note is that as of September 2018, William Dawes and Alexander Lemon have not been paid their compensation since 2015. Total accrued compensation is £128,809 each.

Value disconnect?

Mkango’s joint venture partner will have paid £12 million for 49% of Songwe. We can compare this with Mkango’s current market capitalisation of £10 million. With an upgraded resource, feasibility study and and potentially tightening REE market, the projects value could be significantly north of where it is at present.

Given that Mkango is funded through to the bankable feasbility study and not reliant upon the market for funding I believe that the company is attractive compared to many other AIM vehicles who will need to continually raise. I look forward to upcoming drill results and an upgraded resource over the coming months.

 

At the time of publication, the author holds a long position in MKA.

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