Mkango Resources (MKA.TSX.L) Vertical integration ambitions gather momentum

The formalisation of plans to develop downstream processing in Europe is a major milestone for Mkango as it advances its vertically integrated ‘mine-refine-recycle’ strategy.

Development of the proposed REE separation facility in Poland will enable Mkango to add value to the purified mixed REE-enriched carbonate that it plans to produce from its Songwe Hill mining project in Malawi, increasing margins and enhancing marketing flexibility through the production of separated oxides attractive to a broader range of potential customers.

The site benefits from excellent existing infrastructure, a skilled local workforce and direct access to key processing reagents from its Polish partner’s existing chemicals facility. This should ensure favourable operating costs, while the central European location provides good access to international markets.

The latter is of great strategic significance given growing demand for diversified (non-China) secure supply chains from REE-dependent developers of ‘green’ technologies and other strategic applications. Complementing both Songwe Hill and Mkango’s rare-earth magnet recycling initiatives in the UK, development of the plant will thus uniquely position Mkango as a supplier of sustainably sourced REE products across the full REE life cycle.

  • Downstream processing plans evolve: Following extensive due diligence, Mkango has entered into a strategic alliance with Polish chemicals group Grupa Azoty Pulawy (GAP) to collaborate on the development of a REE separation plant in Poland to further process purified mixed REE carbonate from Mkango’s planned Songwe Hill mine in Malawi. An exclusive lease option over a site adjacent to GAP’s large-scale fertiliser and chemicals complex at Pulawy has been signed. Located in a special economic zone, the site offers potential tax incentives and excellent access to key European and international markets.
  • Targeting 2kt pa NdPr oxides: The plan envisages an initial production rate of c2,000tpa of separated neodymium/praseodymium (NdPr) oxides – the key ‘magnet’ light REEs crucial to many ‘green’ technologies – but also a heavy REE enriched carbonate containing c50tpa of dysprosium and terbium oxides. Though principally envisaged as a hub for further processing of Songwe’s REE carbonates, Mkango will also assess the potential to process third-party feed.
  • Low operating cost structure expected: The plant will utilise best-in-class conventional and proven technology, benefiting from excellent existing rail and road infrastructure, a skilled local workforce, on-site engineering/project development expertise and, crucially, direct supply of key processing reagents from GAP. Mkango expects that this will yield a “highly competitive” operating cost structure, a conclusion corroborated by scoping studies undertaken to date.

Next steps: A feasibility study will now be rolled out, running in parallel with the ongoing feasibility study of Songwe (scheduled for completion by the end of this year). Technical consultants (including REE separation experts Carester) will be supported by GAP and Mkango’s Chief Technical Advisor Mike Vaisey (formerly of Lynas Corp). Mkango has also appointed an experienced Polish in-country director to oversee its newly established subsidiary, and has begun engaging financial institutions with a view to accelerating development of the plant.

Valuation: We await more detailed guidance on the expected cost structure of the planned facility and completion of the Songwe Hill feasibility to refine our cash flow model. However, our preliminary analysis points to operational EBITDA potential of over US$150m pa (100% basis) from such an integrated development, and read-through equity-attributable value for Mkango today of at least 40p/share, rising to well over 100p once full-scale production is attained.

*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.

Nick Chalmers | Partner

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