Mkango climbs on Malawi’s REE potential

It’s a little unusual for a Canadian junior to skip a preliminary economic assessment and proceed to the prefeasibility stage, but that strategy seems to have worked for Calgary-based Mkango Resources (TSXV: MKA), judging by the share-price appreciation it enjoyed after releasing prefeasibility numbers for its rare earth element (REE) project in southern Malawi.

The prefeasibility study of its wholly owned Songwe Hill project released on Sept. 23 outlines an after-tax net present value at a 10% discount rate of US$293 million, and a 36% after-tax internal rate of return. Those numbers sent Mkango’s shares soaring the next day by 77% to 19.5¢ a share. (At press time they traded at 23.5¢ — a 52-week high.)

“Mkango has spent the ‘downtime’ of the last two years proving up its resource and getting its thoughts in order for a cogent production plan, and this has now born fruit,” London-based Christopher Ecclestone of Hallgarten & Co. wrote in a research note.
“Mkango adds to our theory on the 2010 REE ‘stars’ that the ‘first shall be last and the last shall be first,’ as Mkango draws ahead of the one-time stellar stories that fizzled and burnt, becoming Black Holes sucking in money and producing nothing of consequence.”

Based on probable reserves of 8.5 million tonnes grading 1.60% total rare earth oxides (TREOs), an open-pit operation at Songwe Hill would have an 18-year mine life and produce a high-grade, heavy rare earth-enriched and purified chemical concentrate.

Annual processing capacity is assumed to be in the range of 500,000 tonnes yielding 2,840 tonnes of REO in mixed chemical concentrate a year, with most of the cerium removed during the hydrometallurgical process. The study is based on a total rare earth basket price of US$55 per kg REO, which reflects the removal of the cerium.

Ecclestone says taking out the cerium makes a lot of sense. “Cerium, rightly, is considered to have challenging market fundamentals and, under Mkango’s current strategy, there is a strong economic rationale to remove as much as possible of the cerium from the final concentrate,” he says. “This will be stockpiled in the event that a market develops for it in the future.”

Mkango would use contract mining and expects to start operations in 2017.

Initial capex of US$217 million, including a US$20-million contingency, puts the project “at the low end of those out there in the rare earth space,” Ecclestone says. Sustaining capital is estimated at US$1 million per year.

During the first five years cash-operating costs are estimated to average US$13.4 per kg REO and US$17 per kg REO for the mine’s life. The study assumes an additional cost of US$10 per kg REO to account for the cost, discount associated with toll separation and the sale of a mixed chemical concentrate.

The project has rare-earth mineralization outcropping on the northern slopes of a steep-sided hill, 70 km from Blantyre, the country’s largest commercial centre.

In November 2012 the company completed a resource estimate that used a 1% TREO cut-off grade to delineate indicated resources of 13.2 million tonnes grading 1.62% TREO and inferred resources of 18.6 million tonnes grading 1.38% TREOs.

Alex Lemon, Mkango’s president and founding director, says the company has “huge opportunities to expand” because it has only drilled 50% of the deposit, and notes that the main revenue drivers of Songwe Hill — neodymium (37%), dysprosium (14%), praseodymium (13%) and europium (18%) — are leveraged to the high-grade magnet industry. Rare earth-enriched magnets are used in everything from iPads and iPhones to Prius cars, MRI machines and wind turbines.

Lemon concedes that Malawi, a landlocked nation in southeastern Africa bordering Zambia to the northwest, Tanzania to the northeast and Mozambique to the east, south and west, is not well known for mining — with the exception of a uranium mine on care and maintenance in the north — but attributes its late start to its first president, Hastings Kamuzu Banda, who was in power from 1964 until 1994.

“Malawi is a fantastic country to work in — it has laws based on British Commonwealth law, and has huge geological potential,” Lemon says. “The reason the country’s natural resources sector has been falling behind its neighbours is purely because of history.”

When Malawi became independent from the U.K. in 1964, Lemon explains, former president Banda let it be known that Malawi was an agricultural nation and not a mining nation. “This was because as a young man, he had worked in the gold mines of South Africa where conditions were harsh, and it was due to this that he had an underlying disdain for the mining industry,” Lemon says.

That is one of the reasons, however, that makes Malawi such a great opportunity for exploration companies to make discoveries today, he argues. Organizations like the World Bank also recognize that potential. Over the last year, US$40 million has been granted to develop Malawi’s resource sector, primarily from the World Bank, the European Union and the French and Japanese governments, Lemon says.

Last year the government of Malawi contracted Canadian firm Sander Geophysics to undertake a country-wide geophysical survey. The survey is part of the Malawi Mining Governance and Growth Support Project, which is financed using proceeds of a US$25-million loan from the World Bank International Development Association and a €5-million grant from the European Union.

Meanwhile, mining giant Vale (NYSE: VALE) has spent over US$1 billion to build an export railway line from its coal deposits in Tete, Mozambique. The rail line crosses Mozambique into Malawi and runs back through Mozambique to the port of Nacala on the northern coast.

“The rail line is quite close to our project,” Lemon notes, adding that once complete in January 2015, it will only take 24 hours to import equipment to the Songwe Hill site from Nacala, the deepest natural port on the east coast of Africa.

Lemon chalks up Mkango’s speed in advancing Songwe Hill to a number of factors. The reason the company applied for the exploration licence in the first place, he explains, is that it discovered old records in the Malawian Geological Survey library that described the potential of the Songwe Hill area. The project had already been drilled to a 50-metre depth by the Japanese in the late 1980s, so the project had already been “significantly de-risked,” he says, with a small resource of just over 1 million tonnes.

“The information we gleaned from those reports was enough to give us comfort that it was worth looking at the geology and apply for the exploration licence, and begin exploration work,” he says. The company began exploring once licenced in 2010, with help from consultant Alan Woolley, a geologist, mineralogist and a research associate of the Natural History Museum of London (NHM). Woolley is a renowned specialist on carbonatites (one of the main host rocks for rare earth elements), and has worked in Malawi since 1965.

“He has written a series of books describing all known carbonatite deposits of the world in four volumes,” Lemon says. “In 1965 he mapped the Songwe Hill prospect complex as part of his PhD … he helped us a lot in the first year to advance the exploration on the geology and mineralogy side — particularly training our local team of geologists — and enabled us to within 12 months get enough mapping and sampling to produce a 43-101 report that allowed us to list Mkango Resources on the TSXV.”

The $7.8 million Mkango raised from the listing in 2011 was used in the first and second drill programs and enabled the company to complete a resource estimate by Nov
ember 2012. “We were so confident about the resource of the hill we drilled at 20-metre intervals and that allowed us to get almost half the resource in the indicated category,” he says. “This gave us the confidence to move straight into a prefeasibility study rather than completing a PEA first. So we have moved from a semi-greenfield site to completing a prefeasibility study within four years.”

Over the last three years Mkango also has completed mineralogical, processing and engineering work with Mintek from South Africa, SNC Lavalin and London’s Natural History Museum. The company added to its geological team in 2011, recruiting Aoife Brady, who as part of her PhD thesis focused on carbonatite mineralogy.

Mkango also added Scott Swinden as a geological advisor. Swinden, based in Halifax, N.S., is a specialist in the geology and geochemistry of rare earth elements and rare metal, and co-authored Mkango’s technical report in 2012.

“We’ve built a project that we believe can be supported in the current market,” Lemon says. “We know it’s financeable and it will work.”