Contango: a hedge that could be gold!

Contango Holdings PLC is a company I recently invested in. Initially when I heard the word ‘coal’ I switched-off but a fellow investor said I should have a look, so I did.

I’m not going to go into a lot of detail in this blog as I’ve already done that In my research note here but essentially the play is coking coal, a critical ingredient to make steel.

bank bars business close up

Most of my investments (particularly in resources) are early stage plays where there is a clear path to value whether that be by proving up a resource, obtaining permits or reaching economic milestones such as producing PFS/DFS. All of these are de-risking steps that if executed right, should see share price appreciation.

Contango is a little different, it’s a play on near-term cash flow with their model being to acquire assets for modest sums that can produce comparatively high cash flow that can then be paid back to investors and re-invested into the business.

That said the Lubu Coal project is a huge resource and over time can be expanded but the major appeal here for me is that based upon an initial 1Mt pa mining operation and the forecast FCF that will throw off, if the company distribute c.50% of profits pa back to shareholders, I’ll have had capital payback in just a few years.

So this adds some diversity to my portfolio and removes some risk from the portfolio that longer-term plays may not deliver (a kind hedge if you like). Of course there are still risks regardless but the company are progressing rapidly towards first production expecting to formalise LOI contracts for 32,000t pm this month and deliver additional off-take to hit the monthly target c.70,000-80,000t pm

Commissioning of the project and appointment of contract miners is all on target for Q4 (subject to formal contract agreements being in place) There is no large Capital outlay here its a simple mining operation that works at scale and delivers the revenue.

Why could it be Gold?

The company also announced today that in addition to the coking coal operation they are looking at some near-term gold interests as follows:

‘In particular Contango has identified a number of gold opportunities which could be monetised in the near-term through a toll treatment model in conjunction with exploration/development upside’

‘This would enable a staged development and expansion, along with potential asset level or off-take funding, which would minimise any dilution and offer significant value to shareholders, particularly given the current gold price environment’

We will have to wait and see what this translates too but is certainly a hint that there could be something coming on this front which would further add some diversity for shareholders and could be funded via off-take and debt based instruments given the backing of the coking-coal project.

I think it’s an interesting company that is certainly undervalued if you consider its current £11m cap Vs c.$17m+ in EITDA pa. from the initial mining operation.

The nice thing for new investors is it’s still under the radar but may not be for much longer should we see off-take contracts formalised which in turn trigger the ramp up of production, throw something gold into the mix and could get even more interesting!

Disclaimer

Research Notes and Blogs prepared by @TheMoneySponge. These should not be taken as investment advice and accuracy in statements cannot be guaranteed. These are to assist other researchers who may wish to research further and serve as a starting point. I may hold a position in the company 

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