Jangaga Mines (LSE:JAN) jumped over 16% into the market close yesterday as news spread regarding the sale of a royalty share of its flagship Pedra Branca asset. Solitario Zinc Corp (NYSE:XPL; TSX:SLR) sold a 1% Net Smelter Return (NSR) royalty in Pedra Branca to private Cayman Island based SilverStream, as part of a deal worth C$600k (c.£350k). This looks highly encouraging for Jangada’s shareholders, not least because Solitario described the Pedra Branca component as its “centrepiece royalty property”.

Under the terms of the agreement, Solitario will receive C$250kin cash, and C$350k in a convertible note which will convert into SilverStream stock should the company complete an IPO within 12-months. The deal also includes an additional 1% NSR in a Mexican asset and an option right to acquire a 1.5% royalty on a third asset in Montana.

Despite the transaction involving three separate royalties, its Solitario’s description of the Pedra Branca element as the “centrepiece”, which has caught AIM investors’ attention. Solitario’s description makes sense since Pedra Branca is the only one of the three assets that has a JORC compliant resource. As such it is a significantly larger and more advanced project. 

This is not surprising when taking into account Pedra Branca’s economics. This is a story we have highlighted a number of times on MiningMaven, but the NSR deal offers a new dimension of analysis.

A Net Smelter Return royalty is a royalty arrangement whereby the holder receives a new percentage of revenue generated from the sale of a mine’s metals, less all refining and transportation costs. It’s considered a preferential type of royalty since exploration and capital expenditure are not deductible from it, meaning payments are higher in the short-term.

As it happens, in the case of Pedra Branca the forecast payback period on investment is a mere 1.6 years anyway. That has been calculated on current commodity prices, which still appear to be at the lower end of their current cycle. This is, of course, with the exception of palladium, which has had a strong run over the past year. Pedra Branca’s production is forecast to be $64k ounces of PGM+AU per annum, which, very roughly equates to revenues of US$55m at today’s spot prices.

The project looks increasingly attractive when you consider it boasts a very low capital expenditure (CAPEX) requirement of around US$33.8m to build the processing plant. Operating expenditure (OPEX) has been estimated at $17.32/t based on processing 2.2m tonnes of ore – that’s just over US$38m per year.  All in all, Jangada forecasts total costs for year one will come in at around US$81.5m.

Focussing back on the deal and (adjusting for US currency, to compare like for like) if we assume US$200k – less than half of the value of the Solitario sale - is attributable to the 1% NSR royalty of the Pedra Branca project, this would translate to a current US$20m valuation for a 100% royalty. This appears to be broadly in line with the US$192m Net Asset Value (NAV) Jangada has assigned to the project. 

To put this in context, what is surprising is Jangada’s Market Cap is a mere £3.95m at today’s current share price of 2.1p. I highlighted the stock as a potential buy earlier this month at 1.85p after it appeared to have bottomed out. With today’s news adding further weight to the investment case, the company looks even more attractive, particularly when you consider it raised £2.1m last September at 3p per share.

It’s worth noting that Jangada’s directors aligned their interest further with shareholders by participating in the recent fundraise, with both Brian McMaster and Luis Azevedo investing £50,000 each. The company has stated it is fully funded to deliver its Bankable Feasibility Study (BFS) for Pedra Branca and there is plenty of newsflow to come as the project progresses.

With the Solitario/SilverStream deal highlighting and corroborating the potential on offer here it is surely only a matter of time before the market re-evaluates the value it is attributing to Jangada Mines.

Author: Stuart Langelaan

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