Mkango Resources* (AIM:MKA) – Proposed financing with ‘green-tech’ investor

Mkango has signed a non-binding term sheet for up to £3.5m of proposed funding from CoTec, an ESG-focused investor in innovative and scalable ‘green’ technologies for extracting and processing metals and minerals.

The proposed investment is split between £2m of direct funding to Mkango and £1.5m of investment in Maginito, the group’s downstream REE technology ventures subsidiary. The former will bolster Mkango’s working capital as it finalises feasibility studies of and advances financing discussions for its Songwe Hill rare earths project in Malawi and its Pulawy downstream separation plant project in Poland.

The latter will be used by Maginito to pursue further strategic investments in downstream rare earth technologies, Mkango and CoTec also agreeing to co-operate on future processing opportunities in the US. Welcome investment and more evidence that Mkango’s unique ‘mine-refine-recycle’ strategy is a clear point of difference versus would-be REE project developer peers.

  • £2m convertible note financing: Mkango has signed a non-binding term sheet with CoTec Holdings Corp – led by Julian Treger and Braam Jonker – under which the latter proposes to purchase £2m in two-year, unsecured convertible Mkango notes. Carrying a 5% coupon, the notes will be convertible into new Mkango shares at 27p per share. Mkango will use the proceeds to bolster its working capital as it advances financing discussions for Songwe Hill and Pulawy, and finalises feasibility studies. The group had C$4.4m (£2.8m) of cash at its last stated balance sheet date of end-2021.
  • £1.5m equity investment in Maginito: The term sheet also provides for CoTec making a £1.5m direct equity investment in Maginito, Mkango’s wholly-owned R&D arm that is focused on ‘green’ technology opportunities in the rare earths supply chain, including in rare-earth magnet recycling via a 42% stake (with an option to increase to 49%) in UK-based innovator HyProMag Ltd. CoTec’s proposed investment would equate to a 10% equity stake in Maginito, valuing the latter at £15m (broadly in line with the US$20m nominal valuation we ascribe in our risked sum-of-the-parts Mkango valuation). Maginito will apply the proceeds to pursue further strategic investments in downstream rare earth technologies. 
  • Agreement to collaborate on US opportunities: Mkango and CoTec have also resolved to enter into a wider co-operation agreement regarding future investments in rare earth processing technology opportunities in the US.
  • Conditions and timing: The proposals are subject to various conditions, including definitive documentation, restructuring of Mkango UK (Mkango’s wholly-owned UK subsidiary, which is to become a wholly-owned subsidiary of Maginito) and approval from the TSX-V. In consideration for a four-month exclusivity period, CoTec will make a £0.5m advance to Mkango by no later than 20 June 2022, offsetable against (and carrying largely the same terms as) the proposed note financing.
  • Valuation: If concluded, the proposed financing would add welcome funding to Mkango – without any immediate share dilution – as it concludes the Songwe Hill feasibility study and progresses financing for both that project and the proposed Pulawy downstream separation plant. Our near-term valuation target of 45p is based on a conservative 25% risk weighting of our NPV estimate of an integrated Songwe Hill-Pulawy operating scenario. We will look to update our model – and reassess our risk weighting – on completion of the project feasibility studies. While mindful of industry-wide inflationary pressures since we set our model assumptions, we see upside on rare earth pricing – the key ‘magnet’ rare earths of Nd and Pr are currently trading at c.45% premiums to our base-case pricing assumptions. Moreover, commercialisation of Mkango’s rapidly advancing rare earth recycling initiatives – which this proposed financing would also support – offers further ‘blue-sky’ upside potential to our valuation. The next 12-months could be game changing.

*Mkango Resources is a broking client of Alternative Resource Capital, a trading name of Shard Capital Partners LLP which is authorised and regulated by the Financial Conduct Authority (FRN: 538762). This is a marketing communication, intended for qualified and professional investors only, and has not been prepared in accordance with legal requirements to promote the independence of investment research. Please read important disclaimers at the end of the attached document.


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