Wednesday, December 6th 2023

Contango Holdings PLC

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Is Contango flying under the market’s radar?


“…With production at Lubu underway, an offtake agreement secured, cash in the bank, anticipated revenue, and the prospect of results from this year’s drilling at Garalo-Ntiela, the vector for Contango Holdings seems to be pointing upwards…”


The steady progress made by Contango Holdings (LON:CGO) towards unlocking the potential of its coking coal project in Zimbabwe has started to pay off this summer with the award of its first offtake agreement. The company is also defining the potential of a highly prospective gold interest in Mali.

CGO acquired a 70pc interest two years ago in the Lubu Coal Project covering 19,236 hectares of the Karroo Mid Zambezi coal basin in Hwange, a well established Zimbabwean mining district. CGO inherited more than $20m worth of exploration investment by the Project’s previous owners, which, encompassing more than 12,000 metres worth of drilling, down-hole geophysics resource modelling, and mine planning, allowed the publication of a NI43-101 Resource projecting some 1.25 billion tonnes, 702 Mt Indicated and 510 Mt Inferred.

The Project’s high grade 28CV metallurgical coal – which can be ‘cooked’ to produce the coke used by steel and ferro-alloy makers – will be sold to producers across southern Africa. In the course of acquiring Lubu through a £6.4m reverse takeover CGO gained the services of CEO Carl 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.

Shortly after taking its stake in Lubu CGO acquired the Garalo Gold Project in Mali, a $1m purchase consolidated by the £0.75m acquisition of the adjoining Ntiela licence, on Garalo’s western boundary. The combined Garalo-Ntiela Project covers an area of 161.5 km2 within the Sikasso region, about 200 km 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 320 Koz Au at an average grade of 1.5 g/t across three dominant structural trends. A NI43-101 report published early last year identified several new exploratory zones in addition to the resource’s headline G1 and G3 targets, allowing the resource to be upgraded to the 1.8 to 2 Moz range. The report, which indicated gold structures similar to the nearby 2.8 Moz Kalana deposit operated by Endeavour Mining, encouraged CGO to draw up plans for a drill programme to test the interpretations, and to foresee a 30,000 oz per annum heap leach gold operation.

Progress at Lubu


CGO has pressed ahead with a busy exploration and production programme at Lubu. After sample analysis published last autumn ‘exceeded the company’s expectations’, CGO brought forward plans to manufacture its own coke at the Project, as well as to seek offtake agreements. Samples extracted from the Project’s 1A Lower and MSU metallurgical seams, including ash, sulphur and phosphorous contents, ‘demonstrated the commercial characteristics’ of its metallurgical coal, and indicated the potential for producing 96 Mt of high-quality coking coal, with low ash and sulphur and with high yields and swelling indices. The company went on to raise £2.5m to allow it to bring Lubu into production ‘towards the end of Q1 2022’ with batteries capable of producing an initial 150 tonnes per year.

Production commenced in March focused on the Project’s Block 2 site, chosen for its high-quality coking coal and proximity to surface. The company is targeting an initial stabilised mining rate of 5,000 tonnes per month. Production through Q2 this year will be stockpiled pending installation of a wash plant, ensuring sufficient feedstock to ensure continuous supply. On completion CGO expects to sell washed coking coal to Zimbabwean and South African buyers. Whilst sales prices are subject to offtake and future global pricing, the company is confident ‘that margins in excess of more than $300 per tonne should be achievable based on ongoing discussions with potential off-takers.’

Earlier this summer CGO achieved a significant breakthrough by securing its first offtake agreement, with AtoZ Investments, a specialist coal trading company based in South Africa. AtoZ will buy 10,000 tonnes of Lubu’s washed coking coal each month, paying Zimbabwe’s prevailing market price of $120 per tonne. AtoZ has also agreed to take delivery of the washed coking coal at the mine gate and handle all subsequent logistics and marketing, thereby saving CGO associated marketing and transport costs. CGO expects the price to allow margins of around $70-80 per tonne for its washed coal production, opening the potential for yearly earnings of up to $10m. The company believes ‘there is a strong likelihood for further uplift in the … coking coal price from its current levels, which remain significantly below global benchmark prices.’ CGO says it will be able to deliver on its first sales – scheduled for Q4 2022 – at a rate of 10,000 tonnes of washed coal per month. It intends to expand its processing facilities to 300,000 tonnes per annum in H1 2023, funded through internal cash flow.

CGO says it ‘is now in a position to negotiate coking coal offtake contracts at spot prices, and to leverage recent increases in coking coal prices’. Discussions are underway ‘with several interested parties’. The company is ‘also in offtake discussions with respect to its expected coke production’, and has ‘received inquiries from a number of European consumers’. CGO believes ‘there is a good possibility any offtake contracts, either for coking coal or coke, will provide some form of funding, be it prepayment against first production or some other form, which can be utilised in the roll out of its development plan for the manufacture of coke.’

Progress at Garalo-Ntiela


While progressing Lubu CGO has also continued to map a path to production for its Garalo-Ntiela Gold Project. Exploration campaigns in Q2 2021 clarified the prospect’s geological structures and potential for resource expansion, 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 NI43-101 report delivered earlier this year, and indicated areas of new promise. CGO says the results continue to support its long term objective to build 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 30,000 oz per year heap leach gold operation with the potential to generate significant cashflow in return for a modest CAPEX requirement.

CGO began 2022 reporting results from aero-magnetic studies that had ‘yielded multiple high-grade potential target zones’. About half of the ongoing Induced Polarisation (IP) survey had been completed, which, coupled with the results of the aero-magnetic studies and historic drilling, will allow CGO to finalise its 2022 drill programme and firm up the 1.8 to 2 Moz target. The company has ‘received approaches from potential domestic and international investors to support the future development of Garalo-Ntiela.’ Mr Esprey has hosted a number of strategic parties at the site as part of their ongoing due diligence for investing in the project. The IP survey was completed in March, and ‘drill targets are being finalised in conjunction with negotiations with potential strategic investors’. A brief drilling campaign focused on the G1 and G3 deposits will test interpretations to depth, alongside infill drilling, to support an enhanced NI43-101 report.

The world’s continued dependence on coking coal


CGO is producing coke for a world that is still developing the technology necessary to move away from coal-driven steel production. Established steel making processes are going to take some time to green, mills continuing to rely on carbon-intensive blast furnaces loaded with mineral, lime and coke. 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 require huge and sustained investment from an industry subject to cyclical demand patterns that make long-term planning difficult. The use of scrap rather than raw materials now accounts for about a third of steel production and allows 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 customers. The World Coal Association has argued that 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’. CGO says the relatively low 0.5pc sulphur content of Lubu’s coal will require minimal desulphurisation processing to meet World Bank Standards.

The defined southern African markets CGO is targeting, and Zimbabwe’s regulated market price, shelter it somewhat from the the inherent volatility of the coking coal sector, which ebbs and flows with the health of the global economy. Whereas the price of thermal coal used to generate electricity has soared due to the well documented factors driving the energy crunch, the price of coking coal has fallen as demand for steel has stuttered, notably in China. The construction industry – which accounts for about a third of demand – has been subdued, floor space starts and completions falling to annual rates not seen since the global financial crisis. But CGO will be hoping to benefit from an upturn in the cycle. Some of the coking coal usually reserved for steel may be repurposed for power plants, thereby reducing the discount with thermal coal. And though the short term prospects for China and the wider global economy are currently highly uncertain, it is clear that coking coal, like oil and gas, will be necessary to help produce the materials necessary for the energy transition, an economic fact of life noted by Glencore on reporting record profits earlier this month that were supercharged by coal generated earnings of $8.9bn, more than the entire company made in H1 2021.



CGO is currently funded for its programmes to bring Lubu into production and undertake drilling at Garalo-Ntiela. The company raised around £2m through a Convertible Loan and the exercise of warrants last year, and a further £2.5m by way of a November placing. CGO’s most recent interims, to the end of November 2021, stated cash of £2,419,266.

The company’s share price has risen some 15pc over the past 12 months, to 6.62p at the time of writing, taking its market cap to £22.46m. But its stock has often touched levels of around 9p. With production at Lubu underway, an offtake agreement secured, cash in the bank, anticipated revenue, and the prospect of results from this year’s drilling at Garalo-Ntiela, the vector for Contango Holdings seems to be pointing upwards. Natural resources investors may want to look closely at a company recording quiet progress to serve a clearly defined market, and that seems to be flying somewhat under the market’s radar.


Listen to the recent interview with CEO Carl Esprey from @TMSreach, here