Alternative Resource Capital initiates coverage of Mkango Resources as it sees Songwe Hill project as “globally significant”

Analysts at the broker said the rare earth elements project at Songwe is possibly in line to benefit from the “emerging electric vehicle revolution”
Mkango mine

ARC estimated the project could have average underlying earnings of over US$90mln per year when in production

Broker Alternative Resource Capital (ARC) has initiated coverage of AIM-listed miner Mkango Resources Ltd (LON:MKA), saying its Songwe Hill project in Malawi is “globally significant” for the rare earth elements (REE) market.

Analysts at the broker said that REE “are set to be the next commodity beneficiary of the emerging electric vehicle revolution”, although supplies were expected to tighten as China, the world’s dominant producer of REE “continues to rationalise its domestic industry”.

With this in mind, ARC said Songwe Hill is “one of the very few REE projects outside of China that we see having the potential to be brought into production over the next few years, its favourable orebody geometry and mineralogy amenable to simple, low-strip open-pit mining and relatively straightforward, low-temperature mineral processing”.

They added: “This underpins a predicted low-cost structure, with a capex requirement significantly below most of the peer group. We believe cash margins of [around] 60% could be sustained once in production, for average operational [underlying earnings] of >US$90mln [per year]”.

At the start of June, Makango said it had commenced a major diamond drilling programme at Songwe Hill, a key component of a Feasibility Study, which is fully funded by Talaxis Limited, a subsidiary of Singapore-listed commodities trader Noble Group Ltd.

ARC said that this agreement with Talaxis could expose Mkango to 25% of Songwe’s earning potential without any further funding “should Talaxis exercise its earn-in option in full”.

“Talaxis has firmly committed £12mln for a 49% stake to fund the [bankable feasibility study] (of which £5mln has been deployed to date, for 20%), and has an option to move to 75% (and 100% offtake rights) in return for financing the project build (estimated at US$216mln in the 2015 [preliminary feasibility study])” the broker added.

ARC also placed its net present value (NPV)-based evaluation for the group’s shares at around 20p currently but added that this could rise to 100p at production.

In late-morning trading Wednesday, Mkango shares were up 11.5% at 8.7p.

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