Like many of its peers, Metal Tiger (LSE:MTR) has suffered at the hands of a weak commodity market in recent months, with its shares falling from a high of 3.4p to their current 1.4p. However, far from concerning itself with this downturn, Metal Tiger has taken the opportunity to expand its copper acreage in Botswana’s Kalahari Copper Belt (KCB). Indeed, this expansion has been so vast that the company says it now holds more direct and indirect land in the highly-prospective, undeveloped region than any other business in the world. Fresh from setting-up a new exploration joint venture following a beneficial deal with long-term partner MOD Resources, Metal Tiger’s CEO Michael McNeilly tells us where he plans to take operations next.
July saw Metal Tiger take the major step of selling off its 30pc stake in the T3 project, located in the KCB. The news came just months after a pre-feasibility study on the project gave it a base case NPV of $281m and only weeks after a resource upgrade gave it a total mineral resource estimate of 590Kt copper and 27Moz silver.
Metal Tiger sold its stake to its 70pc joint venture (JV) partner on the project, MOD Resources, in exchange for 17.1m MOD shares and 40.7m unquoted options with a nil exercise price and three-year lifespan. It is worth noting that any remaining options will automatically convert to shares if MOD receives a takeover offer.
When combined, the shares and options - worth A$27.7m at the time of the deal - take Metal Tiger’s position in MOD to 25pc, making it the company’s largest shareholder. Alongside the shares and options, Metal Tiger will retain a 2pc net smelter royalty for T3, capped at $2m, and received the right to appoint McNeilly to MOD’s board, allowing some continued oversight of the project.
With the deal taking MOD’s position in T3 to 100pc, both firms argued that one party’s full ownership would make the project more attractive to development financiers. Meanwhile, Metal Tiger said its increased position in MOD would provide considerable ongoing exposure to the project while removing the financial burden of having to contribute to ongoing mine construction costs.
This ongoing exposure could prove particularly useful next March when MOD is expected to deliver a completed definitive feasibility study for T3. Provided it has been granted an environmental impact licence by this point, MOD intends to apply for a mining licence in H1 2019 with the aim of launching T3 into the next stage of its development.
Given that both Metal Tiger and MOD are junior miners, McNeilly says he believes the terms of the deal represent the best outcome for shareholders:
‘This project developed from strength-to-strength very quickly. When work on the DFS began, Metal Tiger and MOD were left in a position where it would be very difficult to attract project financing for T3 because banks are more hesitant to engage with two companies with relatively small balance sheets than they are a mid-sized business or a major. We would have struggled to fund our 30pc stake, so removing our funding requirements and increasing our indirect exposure to the project by exchanging our stake for MOD shares and options was definitely the right thing to do for shareholders. We still have a board seat, so we will be very involved in helping and guiding MOD to protect the investment for our shareholders.’
Aside from allowing Metal Tiger to relinquish its direct position in T3, July’s deal also saw the two firms transfer the 18 exploration licences held in the original JV into a new JV named Tshukudu Exploration. With the permits covering c.8,000km2 in the KCB - or 1,000 times the area covered by T3 - the new JV grants both sides the chance to focus specifically on their considerable exploration potential in the belt.
Like its older iteration, the new JV will be 30pc owned by Metal Tiger and 70pc held by MOD. However, after factoring in Metal Tiger’s assumed 25pc equity position in MOD, the former’s stake in the JV increases to 47pc. The new JV also grants MOD the right to acquire a 100pc interest in any exploration asset on which the two firms decide to complete a scoping study.
McNeilly tells us this increased exposure and ability to sell-off assets before they hit the development stage allows to better focus on exploration, which he calls the company’s ‘modus operandi’:
‘This deal maintains non-contributing exposure to T3’s development while leveraging us further towards exploration. Moving forward, it also gives MOD the ability to pay cash or shares for scoping study assets that it wants to develop. This gets us to where we really want to be - capturing value in the exploration/development chain. We think it is likely that MOD will buy scoping study assets off of us because it removes the need for them to continue paying a 2% net smelter royalty should production begin, in the event that they exercise their option to roll up the entire JV in 3 years from completion.’
A great deal of work had already begun on these licences before establishing the new JV, and progress has only continued since. For example, drilling at the A1 and A4 domes, part of the T3 Dome complex (seen on the map below) has repeatedly found copper mineralisation.
Meanwhile, in September, Metal Tiger announced that the JV had received approval to drill at its T20 exploration project, 100km west of T3. It will target the T4 dome and T4 prospect, where previous RC drilling identified copper. However, its first target has been the T23 dome, where Metal Tiger announced that it had intersected shallow copper mineralisation last month. Additional drilling rigs are now being mobilised to extend drilling in the area and re-start work at T4,
Beyond this immediate workflow, McNeilly remains excited by the sizeable unexplored potential on offer across the JV’s considerable acreage in the belt
‘There is just a huge amount of area that we haven’t even covered yet, and so many different target deposits where we are looking for T3-type deposits where the mineralisation has ideally been thrust up, concentrated and folded over into a nice slab mineralisation near surface. There are also many prospective Ngwako Pan Formation contacts that host other substantial copper deposits at depth. With this much going on, the right thing to do at this time is demonstrate the area’s potential for development. This is why we are going off and drilling other targets and not just spending our money on one area.’
In June, Metal Tiger increased its exposure to the KCB even further by signing a binding agreement to buy up to 50pc of private, Botswanan-focused explorer Kalahari Metals (KML). KML holds interests in seven exploration licences covering 4,063km2 in the Belt, consisting of two 100pc owned licences and five subjected to a earn-in agreement with a business called Triprop Holdings.
Since Metal Tiger announced the agreement, KML has completed a phase one exploration programme on its portfolio, carrying out airborne EM studies on copper projects called Ngami (NCP) and Okavango (OCP). The work generated numerous dome-style exploration targets analogous to the T3 Deposit while modelling has identified over 340km of potentially mineralised geological contact.
KML has prioritised these areas for follow-up work before drill testing once it has acquired the necessary permits. Drilling will proceed at NCP under an environmental management plan agreed with Botswana’s government. OCP, meanwhile, will require a more detailed environmental impact assessment to complete before drilling. Regardless, Metal Tiger believes KML should be in a position to start to test drill new copper targets by the end of Q1 2019.
What’s more, KML extended its stake in the KCB further last month by entering into an earn-in agreement with Resource Exploration and Development to acquire an additional five licences covering 4,661km2 of ground.
Metal Tiger has so far committed to two of the three stages that comprise the deal, giving it a 34pc position in the business. If it decides to commit to the final stage and take its stake to 50pc, then McNeilly believes Metal Tiger will hold an unparalleled land position in the prospective region:
‘I think the market has also missed the fact that Kalahari has acquired another bulk of land in the belt, taking its total exploration interests to more than 8,700km2. This would take its direct and indirect land interest to around 8,600km2. When we combine that with the 8000km2 or so held by our JV with MOD, Metal Tiger has become the company with the biggest landholdings in the Kalahari Copper Belt. We are a very highly leveraged play for a district that at some point is likely to be acquired by a mid-tier or subject to finding enough copper, a large-cap mining company.’
Metal Tiger is building up its exposure to copper assets at a time when prices of the metal sit at a depressed level. After diving to lows of c.$5,800/lb in the third quarter, prices have bounced back slightly since September to lie flat at around $6,169/t. However, they remain well below 2018 highs of c.$7,300/t hit at the end of the second quarter.
The factors driving this downturn vary, but it can at least be pinned partly on lingering concerns over an escalating trade war between the US and China, who have been trading sanctions and threats for the better part of the year. With China representing half of the world’s copper consumption, bears in the market have expressed concern around a slowing of global growth and, in turn, weaker demand for industrial material.
McNeilly disagrees with this negative view, arguing that the supply and demand metrics remain ‘fine’. Indeed, he believes that the copper’s current weakness presents an opportunity to bolster Metal Tiger’s asset base at minimal cost ahead of an inevitable market rebound:
‘At some point, the mid-tier and major miners will have to start investing in exploration again and really start driving M&A again- we have already seen some very encouraging deals. What’s more, we are seeing state-owned companies in China being to pick up assets. This almost opportunistic buying can only mean that, at some point, prices will begin to seriously recover, especially if supply and demand forecasts hold true."
One investor that seems to share McNeilly’s outlook is long-term shareholder and global asset manager Sprott, which has been increasing its position in Metal Tiger steadily over recent months to 15.4pc at last count. Notably, Sprott and its affiliates injected £2.6m into the business over the Summer when it raised £6.2m at 2.8p a share to support the financial commitments related to its MOD JV, its Kalahari tie-up, and working capital. McNeilly believes that the fact Sprott's input represents more than double its minimum commitment to the placing, sums up its enthusiasm for using the KCB as a way of playing any potential copper rebound:
‘Sprott is very committed to the potential of the district, and it's clear to see why - prospective ground packages of this scale are simply very difficult to find. Indeed, within the KCB you have one of the ten largest non-producing, undeveloped resources in the world.’
Unfortunately, Sprott’s optimism around Metal Tiger has not been matched by that of the market. Like many of its peers in the junior resources space, it has been hit by the commodity market slump in recent months with shares falling from highs of 3.35p in August to their current 1.5p. This gives the firm a market cap of c.£21.3m. McNeilly says the complexity of its T3 deal has probably done little to mitigate the negative sentiment triggered by a weak copper market. Accordingly, he feels Metal Tiger is trading at a ‘massive discount to the sum of its parts’:
‘Our deal was complicated, and I think that some areas of the retail market have missed the considerable option value, huge amount of exposure to MOD, and liquidity it grants us. However, I would argue that we should not be trading at a discount as we have direct project interests and are contributing and we have a track record of being able to generate returns at minimised dilution. If anything, we should be trading close to or even at a premium because we can generate returns that a lot of these mining juniors simply cannot offer. The truth is that the market is tough this year. Many miners are struggling, and we are all down about the same amount. This will change, and Metal Tiger is well placed to capitalise when it does.’
While complex, Metal Tiger’s deal with MOD looks smart. Not only has the firm maintained exposure to the T3 Project while cutting its funding commitments, but it has also increased its effective exposure to the pair’s exploration assets in the prospective Kalahari Copper Belt. MOD’s London listing last month will only help UK investors in better understanding the real significance of these terms as T3 continues to move forward.
Compounding this, Metal Tiger’s decision to buy a large stake in Kalahari Metals gives it yet more exposure to copper assets at a time when the market looks to have bottomed. Should McNeilly be correct in his belief that the copper market is due to turn around, then Metal Tiger’s huge asset base in a relatively under-developed region could provide investors with a great way to ride the wave.
Author: Daniel Flynn
Disclosure: The author does not own shares in the company mentioned above