Contango: Closing in on first cash flow

A mix of coal and gold that give investors optionality and exposure to near-term cash flow generating projects

Just under a year ago I produced a research note on Contango Holdings. At that time the companies focus was solely the LUBU coking coal project you can read more about that in the note

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Over the course of the year the share price had a nice ride up to just over 10p helped by the addition of a gold project in Mali.

The share price as with many companies has declined since despite the company being well funded by way of a recent £1m CLN with a fixed conversion of 6p per share into equity. Buy price as I write is a 10% discount to that. Notably one of the Directors put another £200k into that CLN along with original investments at the 5p level.

The CLN will fund the 8000m drilling campaign at Garalo along with mine prep works.

At this level below the CLN funding and 50% down from highs when arguably the company are in the best position to date I think it’s a great level for value investors especially looking at the chart.

Lets recap on where they are at

LUBU Coal project

You can scan though the recent RNS for more detail but essentially the company now have a formal agreement with a Zimbabwean subsidiary of a major Chinese industrial company who will require coking coal supply.

This was a big step forward despite Covid-19 delays and the company are now providing the potential off-take partner with bulk coking coal samples that if suitable will be used in their newly commissioned battery ovens.This is the last piece of the puzzle.

As per RNS on May 14th the samples should be collected within 45 days so complete and shipped to the off-take partner by now. Assuming the product meets the off-take partners specification, Contango will likely secure a very lucrative long-term off-take deal and given the battery ovens have been commissioned could result in very near-term revenue. I’d expect news could land anytime.

Garalo Gold Project

This is where we somewhat up the anti! Contango struck a great deal with the acquisition of Garalo as they paid for a project that was sold on the basis of being a few hundred thousand ounces. Since then an NI 43-101 Independent Technical Report delivered in March 2021 highlighted the potential for the Garalo to have up to 2Moz Resource.

The company are rapidly pushing forwards with the gold project and intend on building a processing hub in the region that will support multiple open pit mining operations.

They’ve completed the aeromagnetic survey and are now running an 8000m drilling campaign to firm up the resource all of which is funded. They’ve also nearly completed construction of the mining camp that will support up to 20 employees and contractors. they really are pushing ahead rapidly and aim to be producing by the end of the year with a target annual production of 30koz of gold. At todays gold prices with a solid margin that would equate to around $30m of annual revenue.

The company plan to fund the plant build by way of royalty and a debt facility.

The busses could all come at once!

So with the coking coal project at an advanced stage of discussions and testing with a major local Chinese subsidiary that will hopefully result in a long-term off-take agreement and the gold project rapidly moving towards production with further drill results expected, it should be a busy H2 news-wise where investors may see the company generating first cash flow and a fair bit of it at that!

Disclaimer

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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