Question : What is a bullish indicator, showing that the market expects the price of the futures contract to increase steadily into the future?
Answer : Contango Holdings PLC
“…With the prospect of promising summer news flow generated by ongoing work at Lubu and Garalo and healthy demand for coking coal from Southern Africa’s steel industry, Contango’s stock could rise again before long…”
Focused on low capex and low opex projects with potential for near term production Contango Holdings (LON:CGO) is pursuing recently acquired coal and gold mining prospects in Zimbabwe and Mali.
Contango took its 70pc interest in Zimbabwe’s Lubu Coal Project through a reverse takeover completed last June, two and a half years after reaching a memorandum of understanding with the mine’s previous owner Monaf Investments Ltd. The £6.4m acquisition, supported by a £1.4m fundraise, brought in Executive Director Carl Esprey, whose career in the natural resource investment and development sector includes senior roles with GLG Partners and Atlas Development & Support Services Limited, which he guided to a dual listing on the Growth Enterprise Market Segment of the Nairobi Securities Exchange; and Non-Executive Chairman Roy Pitchford, a former President of the Chamber of Mines of Zimbabwe, who led the redevelopment of Zimbabwe’s largest gold mine at Freda Rebecca as a director at Cluff Resources, and the development of the Ngezi Opencast Platinum Mine while at Zimplats.
Serving Zimbabwe’s steel industry
Lubu, which covers 19,236 hectares of the prospective Karroo Mid Zambezi coal basin located in Zimbabwe’s Hwange mining district, had already been extensively explored prior to the acquisition. The Project’s previous owners spent more than $20m drilling 101 holes to a total depth of 12,000 metres, carrying out down-hole geophysics resource modelling, mine planning, and other activities to establish an NI43-101 Resource of more than 1.3 billion tonnes, with 702 Mt Indicated and 510 Mt Inferred.
Contango wants to sell Lubu’s coking and high grade 28CV metallurgical coal to industrial consumers in the Southern Africa region. The company has secured two Letters of Intention for offtake contracts with prospective partners worth an estimated $12m a year for the monthly supply of 32,000 tonnes of coking coal. But the major breakthrough came this March when it began discussions regarding a potential long-term offtake with the Zimbabwean subsidiary of a major Chinese industrial company described by Contango as ‘one of the world’s largest stainless steel producers’.
Under the deal Contango would supply coal for several coke batteries its prospective client is building in the Hwange region, with a view to production this summer. The producer is also planning to construct a $1bn carbon steel plant in the country, capable of yearly production of two million tonnes. Contango has suspended mining operations at Lubu until it has a clearer idea of precisely how they should be fine-tuned to meet the producer’s specifications. Last month Contango agreed to extract a 150 tonnes bulk sample of the coking and metallurgical coals located in the mine’s 1A Lower and MSU seams for analysis and testing, after which the partners will commit to a long-term formal offtake agreement.
Mining for gold in Mali
Last autumn, three months after buying Lubu, Contango acquired the Garalo Gold Project in Mali. The $1m purchase, supported by a £1.8m placing, was consolidated this March by the acquisition of the adjoining Ntiela licence, on Garalo’s western boundary. The combined Garalo-Ntiela Project covers an area of 161.5 km2 within the Sikasso region in the south of the country, about 200 km south-east of capital city Bamako. It is ringed by several multi-million ounce gold deposits being mined by the likes of AngloGold Ashanti, IAMGOLD, Barrick Gold, B2 Gold, Endeavour Mining and Hummingbird Resources.
As with Lubu the asset had been extensively explored prior to acquisition, the drilling of some 900 holes establishing a resource of 320 Koz Au at an average grade of 1.5g/t across three dominant structural trends. Contango intends to bring the mine into production in H2 this year, with an initial target of 10,000oz of gold per year, a rate that the company’s mine planning and block modelling studies suggest could achieve production margins of more than $1,000/oz assuming the price of gold stays around its current level of $1,800-1,900. Contango is looking at the possibility of sourcing a further $4m through non-equity capital providers to increase production to a rate of 30,000oz per year, opening the prospect of bringing in $1m per month.
In March the company announced a significant upgrade to Garalo’s potential, a NI 43-101 report conducted by mineral exploration consulting company BRG Consult stating a possible resource of up to 2 Moz. Several new promising exploratory zones were identified in addition to the current G1 and G3 targets, with gold structures anomalous to the nearby 2.8 Moz Kalana gold deposit operated by Endeavour Mining.
Mindful of the imperative to generate revenue as soon as possible Contango is sticking to its initial plan to target first gold in Q4 2021, but the company will undertake exploration campaigns in Q2 2021 to clarify the prospect’s geological structures and resource expansion potential, with a view to establishing ‘a large standalone gold mine with multiple open pit operations across both permit areas’.
Contango reported on progress earlier this month, stating that detailed regolith mapping has been undertaken on both the Garalo and Ntiela sites, land clearance has been completed for a new operations facility, and that more than 1,000 samples have been collected and sent for analysis. Aeromagnetics and airborne geophysics surveys for the collection of magnetic and radiometric data are due to begin next month, and 8,000 metres of drilling will seek to further increase the resource and understanding of the orebody. The company has secured commitments for £1m in a Convertible Loan at a fixed conversion price of 6p per share to provide further support for its programme.
The coal question
Like any coal miner Contango faces the challenge of appealing to a market increasingly attuned to environmental issues. Although the relatively low 0.5pc sulphur content of Lubu’s coal will require minimal desulphurisation processing to meet World Bank Standards, Contango is pitching new coal production within an ever more hostile political and economic environment. In the past few weeks G7 countries have vowed to stop all new financing for overseas coal projects by the end of the year, and the IEA’s radical Net Zero report has argued no new coal mines should be brought online if 2050 net zero targets are to be met.
But fundamental reconfiguration of established steel producing processes is going to be a slow-burning transition. The world’s steel mills continue to rely on carbon-intensive blast furnaces loaded with mineral, lime and coke. Various green hydrogen techniques are emerging as perhaps the most viable large-scale alternative, but overhauling an entrenched smokestack industry that generates two billion tonnes of steel each year will take time, and huge investment from an industry already vexed by chronic oversupply and volatile swings in profitability. The use of scrap rather than raw materials – which already accounts for about 30pc of steel production – allows for a much cleaner production process, but scrap supplies are limited, and raw steel is necessary to produce metal of sufficient quality for the automative sector and other major industries. In the absence, then, of alternatives not yet technically or commercially viable, Contango can make the case that its coking coal has a role to play.
The company’s most recent interim report stated an operating loss of £1,129,659 for the six-month period ended 30 November 2020, but thanks to its fundraises the company is fully funded for its current Lubu and Garalo programmes. At the end of the reported period the company held £1,145,301. Contango is sufficiently confident in its prospects to discuss the possibility of paying out 50pc of future net profits in dividends.
The company’s share price touched nearly 10p during its strong run of announcements earlier this year. Since March the price has drifted down to 6p, though it spiked at 7.5p as recently as May. The company has much work to do to prove the value of its assets, but with sufficient money in the bank to pursue its current programmes, the prospect of a promising summer news flow generated by ongoing work at Lubu and Garalo, a high gold price that seems likely to persist for some time, and healthy demand for coking coal from Southern Africa’s steel industry, Contango’s stock could rise again before very long.