Mustang Resources — Focusing in on Caula Graphite and Vanadium

Mustang’s Caula graphite and vanadium project is in Mozambique along strike from Syrah Resources’ Balama project, which is projected to supply 40% of the flake graphite market by 2020.1 The updated graphite resource at Caula (July 2018) confirmed the high-grade nature of the Caula deposit at 13.4% average total graphitic carbon (TGC), while the presence of significant vanadium (0.37% average V2O5) in the same deposit was confirmed by the recent maiden vanadium resource (July 2018). A scoping study on Caula is expected this quarter.

Given the strong evidence of high-grade, near-surface graphite and vanadium mineralisation, Mustang made the decision in March to advance trial mining and processing in parallel to the scoping study on commercial-scale production. First production from trial mining is expected mid-2019. As well as generating revenue from the sale of the graphite and vanadium concentrate, trial mining and processing would generate detailed technical information for use in feasibility studies of full-scale project development and provide product samples for evaluation by potential offtake partners.

In November 2017, Mustang announced a maiden graphite resource for Caula of 5.4Mt at 13.0% TGC based on the results of just six drill holes. The recent (24 July 2018) resource update added a further 11 drill holes as shown in Exhibit 3 below. Not only did this update increase the size of the resource to 21.9Mt, but the already high graphite grade also increased marginally to 13.4% TGC.

The particular strengths of the Caula graphite resource are that:

The graphite market is divided between natural graphite and synthetic graphite (produced from coke and pitch and tending to be of higher purity but not as crystalline as natural graphite). By end-use the largest segment is in refractory applications, but graphite is also used as anode material for lithium-ion batteries, which is a key demand growth area. Industry analysts Roskill forecast graphite demand growth of 5–7% per annum over the next 10 years, with demand from batteries to grow five to 10 times over that period.3

Natural flake graphite can be used for refractory applications, fire-resistant building materials, graphite foil (requiring high purity flakes and used in many high tech applications) and battery applications (using higher purity flakes to produce spherical graphite). Larger flakes and higher purity flakes attract a premium price which would benefit Caula as metallurgical tests have demonstrated that 63% of total production could fall in the large to jumbo size range at concentrate grades of 97% TCG. Graphite prices are highly dependent on grade and quality metrics and as such, not reflected in a single market index; however, strong price performance in recent years has reflected growing demand from battery applications.

Alongside the strong graphite mineralisation at Caula, the project also offers good vanadium grades from within the same orebody. On 20 July 2018, Mustang announced a maiden vanadium resource for Caula incorporating the six drill holes used to complete the November 2017 maiden graphite resource, as well as the 11 more recent scoping study drill holes (see Exhibit 3 for drill hole locations). The maiden resource totals 22Mt of measured resources at average grade of 0.37% V2O5 (81.6kt contained).

The company believes that as the vanadium is associated with the graphite mineralisation it may be far cheaper to extract and process than the majority of producing vanadium projects, where the vanadium is located in a titaniferous magnetite ore body.4

Preliminary metallurgical testwork at Caulahas shown that vanadium would report to tailings during the graphite flotation process At Balama, Syrah Resources was able to show that a combination of wet high intensity magnetic separation (WHIMS) for magnetic material and flotation of non-magnetic material could produce a concentrate grading >3% V2O5 overall. Chemical processing of that concentrate could produce a 98.5% V2O5 product.5. Preliminary metallurgical tests at Caula have suggested that (as at Balama) a portion of the vanadium could be recovered by WHIMS and additional vanadium recovered from the WHIMS tailings by froth flotation. This work is, however, at a preliminary stage. Ongoing test work is aimed at optimising vanadium recovery and concentrate grade.”

A combination of reduced supply resulting from mine closures (particularly Highveld Steel and Vanadium in 2014) and growing demand has seen the vanadium pentoxide price rise sharply to a high of $18.60/lb currently.6 Since September 2016, the vanadium pentoxide price has risen by more than 300%, making it the best-performing mineral in our dataset.

Demand growth is expected to remain strong (>5% per annum7), driven by:

On the supply side, just 18% of vanadium production comes from primary vanadium mines with the remainder supplied primarily as a by-product in combination with iron from vanadium-titanium-magnetite deposits. As a result, supply growth is determined primarily by demand for magnetite iron ore and may not respond to high vanadium prices. China is the largest producer of vanadium (c 60% of supply) but increasing environmental controls have restricted the ability of Chinese producers to increase supply in response to recent high prices.

Going forward, as demand for high grade V2O5 for use in batteries increases, it is not clear where this new supply will come from as most traditional vanadium supply sources produce ferrovanadium. If metallurgical test results for Caula’s vanadium can echo those of Syrah’s Balama project (located along strike) then Mustang management believes that Caula could have the potential to produce high purity vanadium for the battery market.

On average, graphite exploration and development companies trade at a multiple of US$9.36 per tonne of in-situ graphite contained in measured and indicated resources while vanadium companies trade at an average of US$205.49/t per tonne of in-situ vanadium in measured resources.8

Applying these multiples to Caula’s graphite and vanadium resources respectively gives us a valuation for graphite of US$27.5m (A$37.5m), and for vanadium of US$16.8m (A$22.9m).

The chart below also illustrates a range of potential longer-term value outcomes for the Caula graphite and vanadium project if further drilling continues to increase the size of the resource base. For the purposes of this sensitivity analysis, we have assumed that graphite grade remains 13.4% TGC and vanadium grade remains 0.37% V2O5 (any change above/below this would increase/reduce contained graphite and vanadium and thus potential value accordingly).

Mustang Resources is proposing to undertake an asset-for-shares swap with TSX-V listed Fura Gems (Fura). Mustang will contribute its Montepuez Ruby licences into Fura in exchange for shares in Fura in three tranches as follows:

Prior to any potential future capital raising by Fura, this would give Mustang around 8% of Fura. The transaction is subject to various conditions precedent (on/before 30 November 2018). In parallel to the transaction, Fura Gems is also purchasing ruby licences in the same district from Regius Resources Group. Fura is proposing a dual listing on the London Stock Exchange this year.

Prior to the proposed transaction with Fura, Mustang held interests in ruby mining concessions and exploration licences in Mozambique totalling approximately 192km.2 In late 2016, exploration bulk sampling began, leading to the first sale of rubies in October 2017. Unfortunately, the results of that auction were disappointing,9 and Mustang responded by reducing bulk sampling activities while seeking alternative sales processed to extract maximum value from the asset. As at 10 April 2018, 329,309ct of rubies remained in inventory (which are excluded from the proposed ruby asset sale).

Mustang’s Montepuez ruby project lies in close proximity to Fura’s project of the same name and both are contiguous to Gemfields’ Montepuez mine. Gemfields’ Montepuez is one of the world’s largest ruby deposits with total resources of 467Mct. It was discovered in 2009 and production from bulk sampling began in 2012. To date, Gemfields has sold Montepuez rubies totalling US$407m.10

Combining Mustang, Fura and Regius, Mozambique’s ruby projects potentially provide:

In addition to allowing Mustang’s shareholders to retain an indirect stake in the enlarged Mozambique ruby project, the proposed transaction would also give them exposure to Fura Gem’s Coscuez emerald mine in Columbia. In October 2017, Fura agreed to acquire 76% of Coscuez for a total consideration of US$10m (of which US$2.5m has been paid to date, with the remainder due over three years).

Colombian emeralds account for more than 50% of the emeralds mined globally today, mostly from the Muzo district where Coscuez is located. Emeralds have been produced at Coscuez since at least 1646, but to date modern exploration and mining methods have not been applied to this significant orebody. Mining at Coscuez is an underground mine accessed through a number of small adits. By the end of 2018, Fura aims to:

In the period to April 2018, Fura had extracted 1.6kct of emeralds from 232t of ore (average grade of 6.9cpt). Within the weeks of first production, the company recovered a high-quality 25.97ct emerald, which they named the Äre Emerald. Fura intends to undertake the first sale of emeralds from Coscuez in Q119.