Contango Holdings (LSE:CGO) PLC, the natural resource company developing the Lubu Coal Project in Zimbabwe, said it has raised £7.5mln in an oversubscribed placing which will be used to fund its production and growth plans for coke product and thermal coal.
The company placed 125mln new shares at 6p each with existing and new shareholders, with the placing shares representing 26.4% of the company’s enlarged share capital.
Contango CEO Carl Esprey acquired 694,437 shares in the placing at 6p apiece for a gross consideration of £41,666.
The placees will receive 1 warrant for every 2 placing shares, exercisable at 9p for three years from admission, Contango said.
"I believe it is testament to the attractiveness of the Contango investment proposition that significant funds were available to ensure Contango is now fully capitalised to deliver on both the current offtake and our expansion plans,” commented Esprey in a statement.
“Whilst cost inflation and the strengthening US dollar pushed higher our required capex to first sales and positive cashflow, the company will now benefit given our dollar-denominated sales going forward," he added.
The proceeds from the placing will be used to finalise mine development, complete the installation of the wash plant, acquire further mining equipment and expand operations at the Lubu Project. The new funds will also enable the relocation of additional households from the mine site, the company noted, thereby providing a larger footprint for the mine and operations to meet heightened demand.
In addition, the placing will enable Contango to settle all outstanding borrowings relating to the capital expenditure on developing the mine since the second quarter of 2022.
Contango said it is now fully funded to achieve positive cash flows from the sale of coking coal in the near term under its current offtake arrangement and to fund future growth.
Its current offtake agreement for the sale of 10,000 tonnes per month of washed coal, at the prevailing Minerals Marketing Corporation of Zimbabwe (MMCZ) market price of US$120 per tonne, is expected to provide an estimated margin of around US$80 per tonne.
The wash plant being installed this quarter at the Lubu Project has the capacity to wash 20,000 tonnes per month of coal, double the amount of the offtake contract, and Contango said it, therefore, expects to enter into further offtakes deals in the current quarter to utilise this spare capacity.
This would require the installation of further similar wash plants on-site at a cost of US$1.5mln-US$2mln, which the company can fund from the sales anticipated to begin shortly.
Commenting on its intention to produce coke by installing coke batteries - costing around US$5mln - that process coking coal into coke for the industrial and ferro alloy industries, Contango said it has received “heightened interest” from a number of potential partners and offtakers with respect to the manufacture of coke at Lubu.
It is looking to accelerate this plan, as current market prices and ongoing discussions indicate that the margins on the manufacture of coke are as much as four times those achieved on coking coal production at Lubu.
Contango stressed that it does not intend to raise any additional equity to fund the capex on the installation of coke batteries, but would source the capital from a combination of pre-payment of coke product via offtake, project-level debt and its own cash resources.
The company also recently announced a potential thermal coal strategy given the favourable thermal coal prices, which have risen more than threefold to all-time highs of circa US$450 per tonne this year.
It said it has received a number of requests for the regular delivery of thermal coal from a variety of international markets and is currently looking to finalise export logistics.
Thermal coal could generate margins of over US$100 per tonne, Contango said, noting that this sum could be even higher if it succeeds in securing a rail transport solution rather than trucking to port.
"Demand for our coking coal, thermal coal and coke products is as strong as we have ever seen. We have an existing coking coal offtake in place, utilising only half of our wash plant capacity and I do not foresee any issues in entering another offtake and doubling our earnings potential from our existing production capacity," noted Contango CEO Esprey.
"Most of the site preparation work has now been completed. We are now in full construction mode and opening up the pit further. Our focus remains on being in a position to deliver on first sales by year-end before rolling out our coking coal expansion, as well as our thermal coal and coke products,” he added.