Contango venture into Gold

On Monday the 19th October Contango Holdings (CGO) announced the acquisition of the Garalo gold project in Mali

Contango is a company I recently invested in and you can read my detailed research note which covers the companies flag-ship LUBU coking coal project here. I’ll be updating the note in due course to reflect the recent news.

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The acquisition of the gold project in Mali expands the companies asset portfolio and looks to be a cracking deal. The company will own a 75% stake in the project for a total consideration of just US$1m

Whilst the gold project is not the largest deposit at a current 320koz it’s still significant in terms of expected cash-flow generation. Contango’s business model is to become an early cashflow generating company with minimal outlay such that it can self fund future growth and pay early dividends to shareholders.

Something that when you consider both projects projected cashflow generation and the current £12m Market Cap could theoretically repay your investment in a few years, this is what fundamentally attracted me to Contango and differentiates it somewhat from other Junior resource companies.

So a bit about the Garalo gold project…

The Garalo permit covers 63kmsq in the Sikasso region of Souther Mali. It’s in a highly prospective gold region surrounded by a number of multi-million ounce deposits owned by familiar names such as Barrick, AngloGold Ashanti and Endeavour Mining.

Garalo is an advanced discovery in terms of historical work and spend sporting a 320koz resource at 1.5g/t. Given the high grades this should be a lower cost operation. The resource has previously had extensive work completed including over 900 drill holes which have returned grades of up to 43g/t

The resource is currently non-JORC compliant hence the company have been able to strike what seems to be a very attractive deal. The company plan to expand exploration work and produce an official JORC resource, notably the Board of Contango have historic knowledge and data for the project which shows the initial targets are a small portion of the overall license which remains open along strike.

Based on the initial 320koz resource (expected to increase via the JORC), the company plan to fast-track production with minimal Capex outlay (covered by the 5p placing of $1.8m) producing between 10,000 to 30,000oz gold per annum. The higher end target would require additional Capex that the company would source via debt based and/or royalty financing with the company already in discussion with regional banks versed in the gold sector.

The current resource even at a 30,000oz pa production rate would support a 10 year+ mine life, however as the company have indicated, further exploration work and a increase in JORC resource could support a significanlty longer LOM.

With the comparably high grades and current gold price, the company expect margins to be in the region of $1000oz at 30,000oz pa this would provide for c.$30m annual EBITDA

This would build nicely upon the companies Coking Coal project which also sports some impressive margins and economics which could see the company producing $2m+ in FCF per month from 2021

With Zimbabwe out of lockdown the company have indicated further news here this quarter and we should be looking out for formal off-take agreements of which the first would trigger initial production from LUBU.

Diversification, offering near-term upside…

The gold and coking coal projects offer a nice mixture and diversification for shareholders with both resources in high demand and seeing price increases. This would reflect favourably on margins but the key take-away from here is just how early the company could be generating cash-flow which should ultimately come back to shareholders by way of an early dividend policy.

I’ll be following and blogging on the news with interest as I see this as an exciting investment opportunity with plenty of near-term news due from both projects including exploration/drilling/JORC at the Mali project and production start of both assets slated for 2021.

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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