Mkango Resources Ltd (AIM/TSX-V: MKA) Broker Note via Alternative Resource Capital

Mkango Resources* – Increases exposure to rare-earth magnet recycling tech

Mkango’s ‘mine-refine-recycle’ strategy is gathering momentum with the increase in its equity stake in UK rare earth magnet recycling leader HyProMag. Mkango’s immediate focus remains fixed on completing a feasibility study by early next year of its Songwe Hill primary rare earth production project in Malawi (‘Mine’), and on advancing a proposed downstream rare earth separation facility in Poland (‘Refine’).

But the growing ‘Recycle’ arm of its project portfolio is a key differentiator versus other emerging rare earth project developers. HyProMag offers numerous commercial synergies with Mkango’s primary rare earth assets, but its patented recycling technology also offers potential for the development of a sustainable and competitive rare earth magnet production base in the UK, a country that has no domestic source of primary rare earth production.

Successful scale-up of HyProMag’s technology in the UK in tandem with the advancement of Mkango’s primary mining and processing projects in Malawi and Poland over the coming years would see Mkango emerge as a unique supplier of sustainably sourced rare-earth products across the full life cycle.

  • Moves to 42% ownership of HyProMag: Mkango’s interest in HyProMag – a UK based pioneer of rare earth magnet recycling technology – has risen from 25.0% to 41.6% following the conversion of a £0.2m loan (which formed part of a larger £0.5m financing package completed in January 2020). Mkango has an option to further increase its stake (which is held via its 100% subsidiary Maginito) up to 49%. It also has the first right to provide HyProMag with primary rare earth supply for blending with future recycled production from HyProMag, as well as product offtake and marketing rights.
  • Rare earth magnet recycling technology to be scaled up: The cash retained by HyProMag will be used by the group to support the scale up of its patented Hydrogen Processing of Magnet Scrap (HPMS) technology, a process for extracting and demagnetising NdFeB powders from magnets embedded in redundant electronic equipment which can then be used to manufacture new rare earth magnets. The technology is being rolled out at the University of Birmingham and Tyseley Energy Park, UK ‘centres of excellence’ for magnetic materials, green technology and clean energy innovation. Given the UK has no domestic source of primary rare earths, we think HyProMag’s HPMS technology holds significant strategic value as a potential route to developing a commercially competitive domestic rare earth magnet production base. Moreover, this production route is environmentally sustainable – the short-loop recycling processes employed by the technology require 88% less energy compared to conventional production of magnets from primary rare earth sources and generate an estimated 98% saving in human toxicity.
  •  ‘Mine-refine-recycle’ strategy taking shape: HyProMag complements Mkango’s core portfolio of primary rare earth assets, which comprises the now wholly-owned Songwe Hill mining and upstream processing project in Malawi (for which with a feasibility study is targeted for completion in Q1 2022) and a proposed downstream rare earth separation facility in Poland (to be developed in partnership with Poland’s leading chemicals company). Potential synergies we see include: blending of future primary product with HyProMag’s recycled material; enhanced access to rare earth magnet markets; and a wider product offering. Mkango is evaluating opportunities to further expand its position in the nascent rare earth recycling market, leveraging its increased strategic interest in HyProMag (with associated offtake and supply rights) and HyProMag’s early-mover competitive advantage in a sector with high technological barriers to entry. To this end it has established a new UK subsidiary – Mkango Rare Earths UK Ltd – to develop complementary opportunities in rare earth recycling and green technologies in the UK.
  • Upside potential to valuation: Mkango’s growing exposure to rare earth magnet recycling offers ‘blue sky’ upside to our company valuation. Our near-term target valuation of 45p is based solely on a conservative 25% risk weighting of our NPV estimate of an integrated Songwe-Poland business (full NPV US$520m). We would expect Mkango’s shares to re-rate beyond that level as Songwe and the Polish separation plant project are successively de-risked through completion of final studies, financing and construction. Our preliminary analysis of a potential project financing scenario suggests valuation upside to over 100p as Mkango progresses to commercial production over the coming years, before making any allowance for potential income from recycling ventures.

*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 the important disclaimers at the end of the attached document.

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