The positive DFS of Mkango’s Songwe Hill project in Malawi marks out the asset as one of the very few undeveloped rare earths projects globally to have reached such an advanced stage of evaluation.
The standalone economic results are robust, with a post-tax IRR of 32% and an NPV of US$559m concluded by the DFS, and initial capex forecast to be recouped in the first 2.5 years of operations.
However, we believe integration with Mkango’s planned downstream rare earths oxides (REO) separation facility in Poland will further enhance returns, with the latter enabling more of the market value of the REO contained in Songwe’s mixed carbonate concentrate product to be captured through further processing into separated REO streams enriched in the high-value ‘magnet’ rare earths that are essential for many ‘green-tech’ applications.
We expect a feasibility study of the downstream Pulawy project to be completed over the next 6-9 months, during which time we also expect a mine development agreement with the Malawian authorities to have been agreed (which could see further upside to Songwe’s standalone economics).
The results of the integrated Songwe-Pulawy project will then be announced, setting the platform for construction funding to progress thereafter. The next year could thus prove transformative for Mkango, with simultaneous progression of the group’s rare earth magnet recycling initiatives offering scope for further positive news-flow for this uniquely positioned rare earths play.
- DFS predicts long-life operation and NdPr-enriched product: Mkango has announced the summary results of a definitive feasibility study (DFS) of Songwe Hill that demonstrates the technical and commercial viability of developing the project as an 18-year operation employing conventional open-pit mining and flotation-hydrometallurgical processing to produce an average of 5,954t pa of total rare earth oxides (TREO) contained in a mixed rare earths carbonate concentrate (MREC) grading 55% TREO during the first five years of full production. Around one-third of the latter will be NdPr oxides which are used in permanent magnets for electric vehicles and wind turbines, and which are thus critical to the green energy transition. A full Environmental, Social and Health Impact Assessment has also been completed to internationally recognised standards.
- Robust economic returns: Using TREO basket price forecasts developed by market analysis specialist Adamas Intelligence (which incorporate average NdPr price assumptions for the first five years that are 35-45% above current levels) the study forecasts average annual EBITDA generation of US$215m (nominal) in the first five years of production. It projects that initial capex (US$227m, excluding US$34m of contingency) would be recouped within 2.5 years of full production commencing. The DFS concludes a post-tax IRR of 31.5% and an NPV (at a 10% nominal discount rate) of US$559m.
- Scope for further optimisation: Mkango has delivered the DFS at a point of extreme inflation across the mining industry, which has inevitably had a detrimental impact on opex and capex estimates. There is scope for these to be reduced if current market dislocations unwind between now and the start of construction/production, while Mkango will also look to lower certain cost drivers during the detailed engineering phase.
- Significant upside on downstream integration: The DFS economic analysis does not consider likely value addition from Mkango’s proposed Pulawy REO separation project in Poland, which is expected to take all Songwe’s MREC product, or its rare earths magnet recycling initiatives. An integrated downstream business with a captive source of primary raw material feed should add significant value – the Songwe DFS assumes the MREC is sold at a 27% discount to contained REO value, much of which will be recouped by Pulawy. The DFS results for an integrated Songwe-Pulawy project will be announced when both the Songwe Mine Development Agreement is completed (which may also enhance Songwe’s stand-alone economics) and once the DFS for Pulawy is completed.
- Valuation: We have updated our valuation (which incorporates our NPV estimate of an integrated Songwe-Pulawy project) for both the DFS results and upwardly revised TREO pricing assumptions (the latter conservatively at a discount to the DFS forecasts, though above current market levels). Our heavily risk-adjusted (0.3x full value) NAV of 75p per share suggests Mkango is significantly undervalued today, while we see further upside as the project is advanced through funding, construction and, ultimately, into production.
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