Wednesday, September 27th 2023

Contango Holdings PLC

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Roll on 2022 for a flush Contango Holdings


“…We repeat our suggestion earlier this summer that Contango Holdings, with increasingly well defined revenue generating projects on the horizon, is one to continue to watch…”


As noted in our interview with CEO Carl Esprey last month, Contango Holdings (LON:CGO) is moving into 2022 flush with funds to advance its coal and gold prospects in Zimbabwe and Mali, having recently completed £2.5m placing. Since we last wrote about the company in June the company has been busy refining its strategy to move both assets into production.

To recap, Contango acquired a 70pc interest last June in the Lubu Coal Project, covering 19,236 hectares of the Karroo Mid Zambezi coal basin in Zimbabwe’s Hwange mining district. The licence had been extensively explored by its previous owners, who spent more than $20m drilling more than 100 holes to a total depth of 12,000 metres, and carrying out down-hole geophysics resource modelling, mine planning, and other activities to establish a NI43-101 Resource of more than 1.3bn tonnes, with 702Mt Indicated and 510Mt Inferred.

Contango’s objective is to sell the Project’s high grade 28CV metallurgical coal – which can be ‘cooked’ to produce the coke used by steel makers – to industrial consumers across southern Africa. In the course of acquiring Lubu through a £6.4m reverse takeover, the company gained the services of Mr Esprey, whose career in the natural resource investment and development sector includes senior roles with GLG Partners and Atlas Development & Support Services Limited, and Non-Executive Chairman Roy Pitchford, who led the redevelopment of Freda Rebecca, Zimbabwe’s largest gold mine while at Cluff Resources, and the development of the Ngezi Opencast Platinum Mine during a period at Zimplats.

Last autumn Contango also acquired the Garalo Gold Project in Mali. The $1m purchase was consolidated this March by the £0.75m acquisition of the adjoining Ntiela licence, on Garalo’s western boundary. The combined Garalo-Ntiela Project covers an area of 161.5km2 within the Sikasso region, about 200km south-east of the Malian capital Bamako. It is surrounded by several producing multi-million ounce gold deposits mined by the likes of AngloGold Ashanti, IAMGOLD, Barrick Gold, B2 Gold, Endeavour Mining and Hummingbird Resources.

Like Lubu, Garalo-Ntiela had been extensively explored prior to acquisition, the drilling of some 900 holes establishing a resource of 320Koz Au at an average grade of 1.5g/t across three dominant structural trends.  A NI43-101 report published in March significantly upgraded the resource to 2Moz, identifying several new promising exploratory zones in addition to its flagship G1 and G3 targets, and gold structures similar to the nearby 2.8Moz Kalana gold deposit operated by Endeavour Mining. Initial plans are to produce a 20-30,000oz per annum heap leach oxide operation targeting margins of $1,000/oz or more.

Progress at Lubu


Contango’s focus this year has been to fine-tune development strategies for both projects, and to undertake fundraising to support future work. 2021 began with the company in discussion with the Zimbabwean subsidiary of a major Chinese industrial company – described by Contango as ‘one of the world’s largest stainless steel producers’ – regarding a potential long-term offtake agreement. Under the deal Contango would supply coal for coke batteries its prospective client is building in the Hwange region. The producer also has plans to construct a $1bn carbon steel plant in the country, capable of producing 2Mt a year. The prospective partners undertook ‘a productive site visit’ in H2 2021, and subsequent discussions have continued to ‘make good progress’.

But after results from sample analysis published in October ‘exceeded the company’s expectations’ Contango is now fast-tracking plans to manufacture its own coke at Lubu. Samples extracted from the Project’s 1A Lower and MSU metallurgical seams, including ash, sulphur and phosphorous contents have ‘demonstrated the commercial characteristics’ of its metallurgical coal, and indicated the potential for producing 96Mt of high-quality coking coal, with low ash and sulphur and with high yields and swelling indices. The company said that while the results ‘reaffirmed our confidence in entering into the aforementioned offtake arrangements’, having ‘recently visited a number of potential customers’ it is planning it to install its own coke batteries onsite next year, with a view to taking advantage of significant demand both regionally and globally for quality coking coal.

Last month Contango raised (a gross) £2.5m to allow it to bring Lubu into production ‘towards the end of Q1 2022’. The company intends to install an initial 150Ktpa coke battery by the end of the year, with a view to ramping up production thereafter through recourse to ‘existing cash resources, cash flows from coking coal sales, as well as offtake-linked finance and debt’.

Continued demand for coal


Global demand for all forms of coal has risen significantly along with other energy sources this year: it is still a reliable source of baseload power for electricity grids, especially in Asia where many continue to live with energy poverty. High-energy Australian coal, a benchmark for the vast Asian market, has risen from $80 per tonne at the start of the year to around $150, at times reaching heights of $250. Factors driving demand include rebounding electricity demand in China, utility companies in north-east Asia and Europe switching to coal in the face of spiralling gas prices, and supply disruptions in South Africa and Indonesia, two key producers. The value of metallurgical coal has increased from $161 per tonne to $451 per tonne over the last year, and the price of coke by 70pc over the same period to current levels of around $670 per tonne.

Coal supply is of course under increasing pressure as the world transitions to renewables. Last month’s COP26 meeting in Glasgow pledged to ‘phase-down’ coal production, and a radical report published earlier this year by the International Energy Agency argued no new coal mines can be brought online if 2050 net zero targets are to be met.

But established steel making processes are going to take some time to green. 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 2bn tonnes of steel each year will require huge investment from an industry already vexed by chronic oversupply and volatile swings in profitability. The use of scrap rather than raw materials, which now accounts for about 30pc of steel production, allows for a much cleaner production process, but scrap supplies are limited, and raw steel is still necessary to produce metal of sufficient quality for the automative sector and other major industries. In a recent opinion piece for the Financial Times World Coal Association chief executive Michelle Manook suggested governments and energy producers should be trying to ‘phase-in’ clean coal technologies such as carbon capture and storage rather than ‘phase-out’ a resource that remains an essential ‘building block’ for ‘the manufacture of steel and wind turbines, cement and aluminium’. Contango says the relatively low 0.5pc sulphur content of Lubu’s coal will require minimal desulphurisation processing to meet World Bank Standards.

Progress at Garalo-Ntiela


The company has also been busy clarifying a path to production for its Garalo-Ntiela Gold Project. Contango undertook 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. Analysis of magnetic and radiometric data gathered through aeromagnetics and airborne geophysics published in October confirmed the potential of the G1 and G3 deposits that formed the basis of the 2Moz NI43-101 report delivered earlier this year, and indicated areas of new promise. Contango says the results continue support its long term objective of constructing a processing hub capable of supporting multiple open pit operations, but have also encouraged it to formulate a near term plan to establish a smaller standalone 30,000oz per year heap leach gold operation promising to generate significant cashflow in return for a modest CAPEX requirement.

The company’s next step is to undertake a brief drilling campaign on the G1 and G3 deposits to test interpretations to depth, alongside infill drilling, to support a formal enhanced NI43-101 report. The work will be supported by the ‘balance of proceeds’ from the fundraise concluded last month. A further update on Garalo-Ntiela is expected ‘before year end’.



Contango has done much work this year to define a credible production and sales strategy for both Projects. It has acknowledged it remains reliant on incremental fundraises to further its programmes. Though the company has not lost sight of its ultimate objective of developing substantial full resource production at Lubu and Garalo-Ntiela, it is planning near term operations at both projects to start generating revenue as soon as possible.

Contango’s progress at Lubu will be particularly worth watching, as it seeks to take advantage of a vibrant local market for coking coal, further energised by favourable market conditions for coal. The company’s share price has oscillated between 6p and 10p this year, as investors weigh its prospects. The stock is currently at the lower end of that spectrum, hovering around 6p at the time of writing. It was as high as 8.75p as recently as October, and may be set to rise again shortly if the company can continue to report positive near term progress at Lubu. We repeat our suggestion earlier this summer that Contango Holdings, with increasingly well defined revenue generating projects on the horizon, is one to continue to watch.