It seems clear that Mineral and Financial Investments Ltd (LON:MAFL) is sitting in a position of subtle, but real strength at its Lagoa Salgada zinc-copper asset in Portugal.
The asset is joint-ventured with Ascendant Resources (TSE:ASND), which is earning in in stages, and making a series of cash payments to Mineral and Financial as it goes along.
It’s already come a long way under the auspices of this joint venture, and now boasts a preliminary economic assessment which sets the pre-tax net present value at US$135mln.
More tangibly, the resource base has gone from the relatively small four million tonnes of ore it had when under the sole ownership of Mineral and Financial to a current 25mln tonnes.
In part, that explains why Mineral and Financial’s shares are up by more than 60% since the joint venture deal was struck, although movements in zinc and other commodities prices also played a part.
Although it has been on an upward trend in recent months, zinc weakened significantly last year due to the depressed and uncertain conditions prevailing as the coronavirus crisis began to unfold in early 2020, and it was against that backdrop that Ascendant sold its’ producing El Mochito mine in April.
That decision in turn signalled a significant shift in the dynamic at Lagoa Salgada, since instead of the support provided by cashflow from production, Ascendant now has to go to the capital markets to find the funds to meet its obligations to Mineral and Financial. In effect, Lagoa Salgada has evolved for Ascendant from a source of future expansion from its base of production in Honduras, to its singular focus. And in that context, Mineral and Financial is quick to note that Ascendant has met all of it financial and operational commitments.
Still, to a degree, it’s a mixed blessing for Mineral and Financial.
Capital markets can be fickle, and there can never be any cast-iron guarantee that equity money will be forthcoming at a satisfactory price for Ascendant shareholders. However, as the sole mineral asset for Ascendant its commitment to Lagoa Salgada is full and total.
On the other hand, that same market fickleness has led Mineral and Financial to remain very cautious about recognising future value on its balance sheet. Mineral and Financial values the investment as heavily discounted future cash flows and not at an estimated market value, which is likely to be carry a higher valuation. Which means that when the next US$1 mln. payment scheduled in three months (June) , the value uplift in net asset value per share terms should be meaningful.
So the key question becomes: is Ascendant likely to have any trouble making the payment? Actually, last year, there was some cash flow timing issues, as the coronavirus wreaked its chaos across markets everywhere and Ascendant was closing the sale of its interest in El Mochito. But Mineral and Financial and Ascendant are on good terms, and indeed Mineral and Financial is actually a shareholder of Ascendant as a result of the original joint venture terms. So when the difficulties arose, a compromise was reached – Mineral and Financial negotiated a 20% increase in the payment and actually received more than the actual US$500,000 it was owed in exchange for a staggering of the payments over 6 months.
This time round the markets are calmer, the price of zinc is up 56%, from US$1,800 per tonne to the current US$2,815 per tonne, Ascendant’s share price is up almost 300%, the coronavirus is largely a known quantity, vaccines are being rolled out, and the appetite for mining stories remains high.
So zinc is on the move, and copper is near cycle highs. Ascendant is increasingly highlighting the copper component of Lagoa Salgada. This should raise the interest and appeal of Lagoa Salgada. The likelihood is that the money will be available for Ascendant. After all, Lagoa Salgada is not only a good asset, in a safe jurisdiction, it is Ascendant’s only asset, and now is not the time to be switching out of mining.
If under any circumstance Ascendant didn’t make the payment, Ascendant’s interest would be frozen at 25%, the option earn-in agreement would cease and Mineral and Financial would retain its 75% interest in Redcorp (the project’s parent company). Since 21mln tonnes of resource has been added to the original four, all told, that seems to be a position of subtle strength.
Mineral and Financial’s own cash and liquid assets position is relatively robust, at £460,000, and working capital in excess of £5M, the company also has a suite of unlisted assets that look set to provide significant upside in the longer term. There’s gold in Costa Rica and Brazil, and oil off the coast of West Africa.
That’s all to the good. But in the near-term, the valuation is likely to be set by success at Lagoa Salgada. The rigs started turning at the South Zone of Lagoa Salgada in January, as part of a 1,400 metre programme that will be combined with downhole induced polarisation surveys and which designed to increase and upgrade the resource.
Ascendant will pay, but Mineral and Financial will be a major beneficiary too.
Jacques Vaillancourt, the chief executive of Mineral and Financial, is certainly confident that the project has plenty more to give.
“The preliminary economic assessment was based around prices below where we are now,” he says.
“And it’s really a placeholder PEA on the Lagoa Salgada North resource and does not take into account the Lagoa Salgada South resource which is now about the same size as the North resource. anyway, because we think the project resource could get bigger.”
The real opportunity for expansion, he reckons, could lie in between the two most heavily mineralised areas, the North Zone and the South Zone. The thinking is that there was an area of mineralisation that joined these zones together which is now faulted, and that a geological event has caused it to drop down by “a couple of hundred metres.”
If that theory could be substantiated it would create a continuous mineralised zone amounting to more than two kilometres, and go a significant way towards bringing Lagoa Salgada up towards the level of its regionally significant and highly profitable peers Aljustrel and Neves Corvo. These are big projects in a well-established mineralised district, and it wouldn’t be surprising if Lagoa Salgada itself started attracting the attentions of some well-known names before too long.
“Lagoa Salgada is everything we were hoping it would be,” says Vaillancourt. “It has a very real chance of becoming something big.”