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ASX:MAN

Mandrake Resources Ltd

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ASX:MAN
- Mandrake Resources Ltd
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$0.037

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Investment Memo:

Mandrake Resources Ltd (ASX:MAN)

- CLOSED

Opened: 25-Mar-2022

Closed: 24-Feb-2023

Shares Held at Open: 2,150,000

Shares Held at Close: 3,150,000

Reason Memo Closed: On September 29th 2022 MAN decided not to go ahead with the acquisition of the Chilean copper project.


What does MAN do?

Mandrake Resources (ASX:MAN) is a junior exploration company chasing a large scale copper porphyry discovery in a region of northern Chile that hosts the world's largest copper mine. MAN also holds ground 30km from Chalice Mining’s Julimar project in WA, Australia.

What is the macro theme?

We see MAN as being leveraged to the global electrification boom and anticipated commodities super cycle over the coming decade.

Copper is already the third most widely used metal in the world, used primarily in buildings and infrastructure projects - two sources of demand likely to benefit from pandemic stimulus. Copper also has a growing demand source from technology - EVs have up to 3.5 times more copper in them than a standard petrol car.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Our Big Bet for MAN Big Bet Tooltip

MAN returns 1,000%+ by making a lithium discovery significant enough to move into development studies, or attract a takeover offer.

Why did we invest in MAN?

Copper project in a part of Chile home to large porphyry discoveries

MAN’s new copper acquisition sits in a region that hosts the world's largest copper mine - the 11.2bt @ 0.8% copper project owned by BHP/Rio Tinto, as well as the the 10.5bt @ 0.6% copper project controlled by state owned Codelco. Both of these are large scale porphyry deposits. MAN’s project sits on similar geological structures and has potential for a large copper discovery.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Historical drilling data indicative of high grade copper mineralisation

MAN’s new acquisition has ~15,000m of historical RC/Diamond drilling results which have returned a peak intercept of 86m @ 4.83% copper from 121m - which includes higher grade sections of 27m @ 7.1% copper from 134m, and 3m @ 14.4% copper from 164m.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Strong balance sheet: At 25 March 2022, MAN had $16.4M in cash

That’s a lot of cash in the bank for a small cap explorer, so MAN is well positioned to aggressively explore any potential discovery it makes across its project portfolio.

[Memo Assessment - 24-Feb-2023]: Grade = A

Since writing this Memo in March 2022, inflation and interest rates have significantly increased. This has made capital for small cap companies harder to come by. In this environment, MAN’s significant cash balance is an asset that it can use to find a strong project to develop.

What do we expect MAN to deliver?

Objective #1: Complete 12 week due diligence period and proceed with acquisition

MAN has set an initial 12 week due diligence period, we want to see MAN complete the DD work and proceed with the acquisition of the project.

Milestones

not done Due diligence completion

not done Acquisition completion

[Memo Assessment - 24-Feb-2023]: Grade = B

After extending the due diligence period, MAN decided to not go ahead with the copper acquisition.

Since the acquisition was announced in March 2022 the macro environment for small cap stocks has materially changed. Interest rates have increased to 10+ year highs, making cashed-up, ASX listed small cap explorers like MAN attractive to project vendors.

We view the decision to NOT go ahead with the project ultimately as a positive, as the company did not allocate resources or capital to a project that it thought would not prove valuable to shareholders.

Objective #2: Drilling program at the newly acquired copper project this year

Target generation works leading up to MAN’s first drilling program at the copper project. We want to see the company conduct at least one drilling program by the end of 2022.

Milestones

not done Geochemical surveys

not done Geophysical surveys

not done Exploration program detailed

not done Drilling permitting

not done Drilling commencement

not done Drilling results

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Objective #3: Maiden JORC resource at the newly acquired copper project

With ~15,000m of historical RC/Diamond drilling results and any addition of new drilling data from drilling programs MAN completes, we want to see a maiden JORC resource for the new copper project either very late in 2022 or early in 2023.

Milestones

not done Drilling results compiled

not done Maiden JORC resource announcement

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

What could go wrong?

Acquisition Risk

The newly announced copper acquisition in Chile is via an option agreement which gives MAN until at least 31 May 2023 to decide if it wants to acquire the copper project. Until then, MAN could pull out of the transaction at any time should exploration work yield no results. There is a risk that MAN elects to not proceed with the transaction and would then need to look for a new project.

[Memo Assessment - 24-Feb-2023]: Grade = B

This risk materialised for MAN

Environmental permitting risk

The Chilean government has signalled that it will put more focus on environmental permitting across the mining industry going forward. There is always a risk the government rejects new mine developments due to environmental concerns and so this is a key risk in Chile.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Exploration risk

MAN is an early stage explorer with no discovery made as yet. As a result the company has no cash flows to fall back on should they fail to make a discovery. There is a risk that nothing will be found.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

Commodity risk

Junior exploration companies rely on elevated commodity prices to access capital. There is always a risk that the copper price falls and markets are no longer willing to finance new exploration.

[Memo Assessment - 24-Feb-2023]: Grade = N/A

Acquisition wasn't completed

What is our investment plan?

We plan to remain invested in MAN at least until it completes due diligence on the Chilean copper project. Given our confidence in the management team, if they choose not to proceed with the acquisition, we plan to continue holding until a new project is identified.

If all goes to plan and our investment objectives are met and the share price rerates, we will then look to take some profit and sell 20%, as per our standard investment plan for exploration companies.

[Memo Assessment - 24-Feb-2023]: Grade = B

As MAN did not complete its acquisition we did not sell any MAN shares. We continue to hold our MAN position.


Disclosure: The authors of this memo and owners of Catalyst Hunter, S3 Consortium Pty Ltd, and associated entities, own 2,150,000 MAN shares at the time of publication. S3 Consortium Pty Ltd has been engaged by MAN to share our commentary and opinion on the progress of our investment in MAN over time.

Investment Memo:

Mandrake Resources Ltd (ASX:MAN)

- LIVE

Opened: 24-Feb-2023

Shares Held at Open: 3,150,000


What does MAN do?

Mandrake Resources (ASX: MAN) is a junior exploration company aiming to make a lithium discovery in North America.

MAN’s lithium brine project is located in the Paradox Basin, Utah USA. This is the same region as $224M capped developer Anson Resources.

What is the macro theme?

Lithium is a critical raw material used in the manufacturing of Electric Vehicles (EV) and grid storage batteries.

The US recently signed into law policies aimed at re-shoring critical minerals supply chains - the USA considers lithium a critical mineral.

The US$400BN Inflation Reduction Act (IRA) mandates that by the year 2027, 80% of the critical minerals in US-made EV batteries must come from US-based mines or from countries with a free trade agreement with the US.

ASX listed Ioneer Limited recently secured US$700M (AU$1BN) from the US government for its lithium-boron project in Nevada, Piedmont Lithium also secured US$141.7M for its lithium plant in Tennessee.

We think that US-based lithium projects will benefit the most from the wave of capital the US government is committing to domestic supply chains.

Our Big Bet for MAN Big Bet Tooltip

MAN returns 1,000%+ by making a lithium discovery significant enough to move into development studies, or attract a takeover offer.

Why did we invest in MAN?

Critical minerals (lithium) project inside the USA

The US has signed into law billions of dollars of spending over the next 10 years on building out domestic critical minerals supply chains. Lithium is listed as a critical mineral in the US critical minerals strategy.

Partnership with Galan Lithium ($344M current market cap)

Galan Lithium is currently developing its lithium brine project in Argentina. Galan has agreed to invest $1.5M for a ~5% shareholding in MAN and has a right to bring on a strategic advisor for a further $700k at the same price. Galan has also agreed to provide technical support to MAN as it explores its projects. We think Galan’s direct investment validates the potential of MAN’s project.

Larger capped neighbour in the same region

MAN’s project sits in the same region as $224M Anson Resources which is developing its lithium project in Utah, USA.

Strong cash position, small enterprise value, leveraged to a discovery

After Galan’s investment, MAN will have ~$19M in cash in the bank. Given no capital raise is anticipated in the short to medium term, investors seeking exposure to the project will likely only be able to buy on market. MAN is currently trading with an enterprise value of ~$14M. This means we think the company is leveraged to a re-rate on material news.

The project was generated organically

MAN has put together the project internally meaning the company doesn't need to make any expensive vendor payments or cause additional shareholder dilution. MAN’s balance sheet can instead be used to develop its project.

Lithium brine potential confirmed inside MAN’s project

It’s early days, however historic well data inside of MAN’s ground has confirmed lithium brine potential. Data shows concentrations of up to 75 mg/L of lithium (inside MAN’s ground). For some context, ~US$1BN lithium brine developer Standard Lithium’s resource is based on concentrations averaging 168 mg/L lithium, nearby Anson Resources' average grade is ~124 mg/l.

What do we expect MAN to deliver?

Objective #1: Increase landholding (project size)

MAN has just recently started staking its ground. We want to see MAN increase its total landholding and in turn the size of its project.

Objective #2: Maiden exploration target

We want to see MAN first publish a JORC-compliant exploration target and then convert it into a maiden JORC resource estimate.

Milestones

in-progress Maiden JORC exploration target.

Objective #3: Re-sampling of existing wells and drilling of a new well

As part of its exploration program, we want to see MAN re-sample existing oil and gas wells in and around its acreage with lithium focused testing methods. We also want to see the company drill at least one NEW well.

Milestones

not done Sampling of existing wells in and around MAN’s project.

not done Drilling of at least 1 NEW well.

Objective #4: Maiden JORC resource estimate

We want to see MAN first publish a JORC compliant exploration target (Objective #2) and then convert it into a maiden JORC resource estimate.

We also want to see the company evaluate suitable Direct Lithium Extraction (DLE) processing technologies as this will determine how much of a resource can be converted into a maiden JORC resource.

Milestones

not done Progress on Direct Lithium Extraction technologies.

not done Maiden JORC resource estimate.

What could go wrong?

Exploration risk

MAN’s lithium project is still relatively early stage considering the company just recently got a hold of its leases. There is always a risk that the company’s exploration programs yield no notable drill results and there is no economically viable lithium resource over its ground.

Processing risk

MAN’s lithium project is hosted in brines. This means that for the project to be processed economically the company needs to find a suitable processing technology for its type of material. Typically this is a type of Direct Lithium Extraction (DLE) technology.

Technology risk

Direct Lithium Extraction (DLE) is yet to be fully commercialised. There is always a risk that no technological advancements are made with the processing tech and so brine projects like MAN’s are considered stranded until suitable processing tech advancements.

Commodity pricing

The lithium price is currently trading near all-time highs. Any negative change in the lithium price may impact demand for new discoveries. This would hurt the share price of a junior explorer like MAN.

Market risk

In the event of a market-wide sell off, we would expect higher risk early stage exploration companies like MAN to sell off even more. This typically happens because during market downturns, investors look to pull capital out of their highest risk investments.

What is our investment plan?

We will look to hold the majority of our position in MAN up until the key catalyst, which we think will be a maiden JORC resource.

If the company achieves key milestones on the way to this catalyst and the share price substantially re-rates on the back of the project de-risking, we will look to sell a further 35% of our Total Holdings in MAN.


Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,150,000 MAN shares and the Company’s staff own 35,714 MAN shares at the time of publishing this memo. The Company has been engaged by MAN to share our commentary on the progress of our Investment in MAN over time.

Our Investment Summary

Date of Initial Coverage

04-Mar-21

Inital Entry Price

$0.080

Returns from Initial Entry

-54%

High Point

-8%