I recently picked up on a company called Contango Holdings PLC (CGO) that had spent a long time in suspension completing the acquisition of its coking coal project in Zimbabwe.
They recently signed their first LOI for off-take to a local coke producer, coke being a key ingredient for making steel. I expect to see more follow.
The news went largely un-noticed by the market and checking out the various social media platforms to do some DD it was evident that it is indeed under the radar, so to speak.
After doing some DD and making contact with the company to find out more about the project I decided to take a position – that wasn’t simple given the stock wasn’t even set up on my trading platform, so I got that sorted and have now taken a position.
The stock is also very illiquid so buying hasn’t been easy especially given it’s still trading around IPO price. The fact it wasn’t set up on my trading platform (a popular one), adds credence to this!
So what’s the story…?
Well the company was previously a cash shell and is main market listed. The strategy was to acquire near term producing assets with an emphasis on bringing in early cash flow. They acquired the LUBU coal project(70%) in Zimbabwe by way of consideration shares equating to an effective $6m purchase price. The company since raised a further £1.4m on relist which leaves them fully-funded to bring the project on-line.
The project is a coal project which includes coking/metallurgical coal and thermal coal. It’s a very large resource which allows for initial production (1mtpa) to be scaled up as appropriate. The initial production itself should be a significant cash flow generator at c.70k-80kMt per month with a margin of approximately $30Mt. With a 70% interest this should generate around $17-20m EBITDA pa. (This assumes collection at the gates and no shipping costs)
I’m currently producing a more detailed research note that will dive into the project in more detail and cover a bit more on the coal market and how that relates to Contango but the main attraction for me is the coking coal angle and that’s going to be the focus for Contango too.
The £1.4m fundraise has left the company fully funded to complete groundworks and refurbishing etc with the intention to start production Q4 2020. The first LOI is expected to be converted into the first formal off-take agreement where final pricing will be determined and trigger the start of mining (COVID permitting!)
The company have a clear strategy, generate cash flow, become self sufficient and then do two things, implement a dividend policy, with excess cash left for re-investment opportunities whether that be additional projects or scaling up the LUBU project.
I like the simple clean approach to this and the exposure to coking coal and if executed successfully should rapidly see an increase in market cap and share price given projected annual EBITDA will well exceed current market cap c.£9m and any dividend with low shares in issue could be significant.
Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.
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