10Aug 2016

Mkango Resources Plc Q&A with Share Talk

mkango-logo

Mkango is focused on the development of the Songwe Hill rare earth project and Thambani uranium project in Malawi. Songwe has advanced from an early stage in 2010 through two phases of drilling, resource definition and extensive metallurgical test work to completion of a pre-feasibility study in September 2014, updated in November 2015, one of only a handful of rare earths projects globally to have advanced beyond this stage and amongst the lowest capex in the sector
The project is an open pittable deposit with long mine life, has significant expansion options, favourable mineralogy and a rare earth mix geared to the high growth permanent magnet sector, and is located in a strategically important rare earths mineral province.

The main exploration targets at Thambani are uranium, niobium and tantalum. In January 2015, Mkango announced the first set of assay results of 142 soil and rock chip samples from 9 trenches, which returned variably anomalous uranium, niobium and tantalum values in most trenches, ranging up to 4.70 % U3O8, 3.25 % Nb2O5 in soil and up to 0.42 % U3O8, 0.78 % Nb2O5 and 972 ppm Ta2O5 in rock chips. In July 2016, the Corporation announced the results of an airborne geophysical survey covering approximately two thirds of the licence area, highlighting a number of significant radiometric and magnetic anomalies.

The company’s corporate strategy is to develop new sustainable sources of rare earth elements and other minerals geared to growth in the low carbon “green” economy, technology and the Fourth Industrial Revolution.
Mkango listed on TSX-V in January 2011 and on the AIM market of the London Stock Exchange in June 2016

Malawi is a relatively unknown country for mining, what resources are in place from the government and external funding and how does mkango tap into these?

The Government of Malawi has been very supportive of Mkango as we have moved the projects forward over the years. One of our key strategies is to collaborate closely on research and development in the sector, currently working with a number major research programmes including HiTech AlkCarb and SoS Rare. In the past we have benefited from South African Government funding both directly and via Mintek in South Africa, and we continue to pursue such relationships where there are clear synergy benefits. We recently announced results from airborne geophysics surveys covering the licences in Malawi which were part of a US$25m World Bank funded country wide project. This is followed by the recently commenced, five-year Geological Mapping and Mineral Assessment Project (GEMMAP), which encompasses country wide ground truthing of the aforementioned airborne geophysical survey.

Songwe hill…
There is already a lot of upside not taken into account at Songwe, ie the inferred resource, how relevant are these additional targets at Nkalonje and Namangale?

Songwe is an advanced stage project with a pre-feasibility study, which we announced in November 2015 following a very extensive work programme over 5 years. Songwe features broad zones of outcropping carbonatite which provided a focus for drilling by Japanese Government groups JICA / MMAJ in the late 1980s and for the two phases of drilling completed by Mkango in 2011 and 2012. These drilling programmes enabled us to announce a substantial Indicated and Inferred Resource in November 2012. The indicated resource formed the basis for the pre-feasibility study.

So when we were awarded the Phalombe licence, Songwe was the obvious target on which to commence exploration given historical work on the project and the fact we could see the potential to expand the historical resource and to extend the previously mapped zones of mineralised carbonatite at surface – and these became the focus for our drilling programmes.

Similar to Songwe, Nkalonje and Namangale are also vent systems, they also have thorium radiometric anomalies, also steep sided hills but contrary to Songwe do not have broad zones of carbonatite at surface, however they do feature outcropping carbonatite veins and dykes. This is positive in that it could indicate potential for a buried carbonatite body. Songwe was eroded to a level at which the carbonatite was exposed in broad zones on the northern slopes of the hill and it may be the case that these other targets were not eroded to a sufficient level to expose any larger zones of carbonatite at surface. This can only be determined by further exploration. In the meantime, the targets will investigated as part of the HiTech AlkCarb research programme which encompasses geophysics and other aspects which will assist in understanding the exploration potential.

So these prospects are relevant from the perspective of the long term exploration and production potential of the broader licence area. A strategic partner is likely to take a long term view, focusing on security of supply over a long time horizon – for example JICA / MMAJ were drilling for rare earths in Malawi, including Songwe, almost 30 years ago, before the hi tech uses for rare earths grew exponentially. Incidentally, Nkalonje was one of the prospects highlighted by JICA / MMAJ as having potential for a carbonatite deposit in their field investigations.

So we believe these additional targets in the Phalombe licence reinforce Mkango’s potential to be a long term, sustainable producer of rare earths, which in addition to our flagship project at Songwe, will enhance the attractiveness of the opportunity from a strategic perspective, particularly coupled with the infrastructure developments in the region which are a fairly recent development and should catalyse development in the region.

P13 of your presentation shows an area of mineralised outcrop outside the resource which has yet to be drilled by Mkango – presumably this would be a priority to drill before the new targets? – when do you see these being drilled?

That’s correct, in addition to the other high priority targets at Songwe.

I would envisage the priorities for drilling at Songwe as follows:
– Infill drilling the existing resource, with the objective of upgrading the in-pit Inferred resource. The In-pit Inferred Resource is currently treated as waste in the mine plan despite being mineralised – only the Indicated resource was included in the mine plan for the pre-feasibility study. If the inferred resource is upgraded and included in the mine plan, this would extend the mine life, lower the strip ratio and operating costs, and potentially adding significant value

page 12

– Drilling mineralised carbonatite outcrop to expand the resource, for example the area circled with a dashed line on page 13 of the presentation. This area is mineralised as we have completed mapping and sampling there in the past, so I would describe it as “low hanging fruit” in terms of potentially expanding the resource.

page 13

– Exploration drilling with a view to extend a high grade zone in the northern part of the currently delineated resource and testing potential for extensions to the south.
In terms of timing for drilling at Songwe, this would be carried out in conjunction with completion of the bankable feasibility study. Our priority and we believe a more cost effective way than drilling to add value in the short term to the Songwe project is to further optimise the processing flowsheet with the objective of reducing operating costs and maximising efficiencies. This strategy will provide a strong foundation for entering into partnerships, marketing and offtake arrangements. Ultimately we are looking for a partner to fund the bankable feasibility study and next stage of drilling at Songwe, thereby accelerating exploration and development of the project.

When will work begin on the new targets under the HiTech AlkCarb initiative?

HiTech AlkCarb is an ongoing research programme focused on establishing methodologies by which mineralogy, petrology, geochemistry and geophysics can be used to make predictions about rare earths and critical metal prospectivity at depth. There will be a site visit to Malawi later in the year at which point we will be providing further updates. The main focus in Malawi will be on interpretation of geophysics and fenite, being the altered rock commonly found in association with carbonatites, so both directly relevant to targets in Malawi.

How much more attractable will the recent news make MKA from a strategic investor’s point of view?

A strategic investor is likely to take a long term view in terms of sourcing sustainable production and whilst the primary focus will be on Songwe, its cost position, resource base and upside, having long term potential exploration upside can only add to the investment case.

What do you see as the biggest drivers for REE that are NOT widely known…

Firstly, on the supply side, there are so few projects positioned to take advantage of recovery in the sector – these would be projects that are advanced stage ie at least a pre-feasibility study, that are in a good jurisdiction, outside China, with good infrastructure, mineralogy and therefore low capex, lowest quartile opex and a rare earth mix geared to Nd-Pr +/- Dy/Tb. There are less than a handful of rare earth projects that meet the criteria, of which Mkango is one. When you compare that to the thousands of, for example, base metal and gold projects, rare earths represent a unique opportunity, and when significant capital flows back into the rare earth sector Mkango will be very well positioned. Every rare earth project is unique in terms of mineralogy so time and technical expertise are key barriers to entry in moving a project to an advanced stage, which is why we believe getting that pre-feasibility study done, at lower cost and with quicker timeframe than many of our peers, was such a big milestone.

Secondly, on the demand side, the recent announcement by Daido Steel and Honda Motor that they had developed a neodymium magnet without heavy rare earths (ie dysprosium and terbium) for use in the driving motor of a hybrid vehicle. Whilst it is early days for this technology, I believe that if widely adopted, it could have a very positive effect on the market for the light rare earths, neodymium and praseodymium, used in magnets. One of the inhibiting factors for growth in demand of rare earth magnets has been concern over security of supply for dysprosium and terbium. If this becomes less of an issue, then demand growth for neodymium and praseodymium (which account for almost 70% of Mkango’s production value) should be significantly enhanced.

Thirdly, the impact of reduced illegal production in China on the market. This has had a negative effect on the rare earth market over the last few years, however the Chinese Government appear to be taking serious steps to reduce illegal and unregulated production. We think this would have a very positive effect on the market. The low price environment may also lead to a natural sterilisation of resources in China through high grading and environmental degradation.

Thambani

With the uranium potential at thambani and the number of nuclear reactors under construction, where does mkango fit into the picture?

Thambani has known uranium potential based on historical work so our strategy is to accelerate exploration of the project through a partnership so the market can better recognise the value and potential of the asset, and so we are well positioned when the uranium market turns. One of the major benefits of working in Malawi is that it is a stable jurisdiction with favourable operating environment and a country that has been through the permitting process for a uranium mine in the past.

Is the plan to sell off the uranium assets to self fund production of the rare earth or to seek joint ventures for both?

We are seeking to joint venture the uranium asset in order to accelerate exploration and development of the project whilst also retaining a portion of the upside.

Have mkango got interest from partners for the rare earth elements and uranium assets at this stage?

There are limited number of opportunities for assets in this space and we continue to explore opportunities with both new groups and those who have been following development of the projects since inception.

Given what is known about the company’s prospects, what percentage would you say is priced into the current market cap?

I believe we are significantly undervalued versus our peer group in the rare earth sector and that the market is currently attributing little value to the uranium project. Just looking at the peer group and other companies in the cleantech space illustrates the potential upside.

How do Mkango intend to close the gap between where the mcap is now and where it will be in line with peers in the sector?

We are continuing to focus on delivering on objectives and working towards positioning the company for further transformational events such as a corporate deal or otherwise to catalyse a re-rating of the stock. We will also continue to keep the market updated with news flow, engage with shareholders and other stakeholders, and focus on getting the message across to the market.

When do Mkango anticipate going into production for Songwe hill and thambani?

The timeframe for completion of a bankable feasibility study for Songwe would be 12 -18 months and construction would be 18 months following this, both subject to funding. Thambani would have a longer timeframe for development as it is at an earlier stage.

What funding expenditures do mkango need short term and long term for development and working capital? Fully funded for how long?

The AIM listing and fund raising in June provided sufficient working capital for 18 months from listing and we are within budget.

The cost of the bankable feasibility study for Songwe is estimated at US$10m and project development at US$216m. We believe the best opportunity to create value for shareholders and accelerate development of the project will be to bring in a financial or strategic partner on the project.

What news flow is due over the short and mid term?

As we have demonstrated since listing, we will continue to update the market on optimisation of the project, research and development in collaboration with a number of major research programmes, developments in Malawi, and in the rare earth and uranium market, and potential new growth opportunities.

What piece of news excites them the most over the next 6 months?

We continue to work towards announcing a corporate deal or funding partnerships for Songwe and Thambani



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