Mithril Resources Ltd (ASX:MTH)

Investment Memo:

Mithril Resources Ltd (ASX:MTH)

- LIVE

Opened: 22-May-2024

Shares Held at Open: 3,790,000

What does MTH do?

MTH Metals (ASX:MTH) is a high-grade gold-silver explorer and developer in Mexico.

What is the macro theme?

Gold and silver are both precious metals which are often used as a hedge against inflation.

The gold price is at an all time high and the silver price is at a 12 year high at the time of this memo.

Silver also has a prominent industrial use case in the manufacture of photovoltaic cells for solar panels - and as such can be considered important to the energy transition.

Silver demand from solar panels is projected to grow exponentially through to 2050 - and it is the fastest growing source of silver demand currently.

Mexico is the largest silver producer in the world, and the 7th largest gold producer.

Why did we invest in MTH?

MTH was capped at >$110M in 2020 and now recapped at $8.4M

Back in 2020 off the back of ultra high grade silver/gold intercepts, MTH’s market cap re-rated to above $110M. We made our Investment in MTH in the recap round at a market cap of $8.4M. With some drilling we hope it can re-rate back to those levels again.

High grade gold/silver JORC resource

MTH has a JORC resource with 373k ounces gold and ~11m ounces of silver. The gold grade for the resource is 4.8g/t and silver grades at 141g/t silver. Both extremely high relative to other gold/silver projects in the market.

Drill rig already on site

MTH has a drill rig on site ready to go and so we should see a lot of newsflow over the next coming months. We are hoping the drilling leads to a material increase in the company’s JORC resource.

Potential to double resource

MTH has previously indicated it thinks the project has the potential for a “multi-million ounce gold and silver” deposit. Looking at some of the drill and rock chip results along the east-west trend, we think there is potential to quickly double the existing resource.

CEO & MD John Skeet has been there and done that (billion $ take over)

John Skeet was GM of projects for Bolnisi Gold from 1997 through to a US$1.1BN deal for its Palmarejo project in Mexico. The takeover was done by the current 7th largest silver company by revenue, New York listed Coeur Mining in 2006. Bolnisi picked up that project in 2004, drilled it out, upgraded its resource and eventually sold it to Coeur 2006. We are hoping Skeet is able to repeat that success with MTH.

Silver price is hitting decade highs

Silver demand is increasing because of demand from the solar panel manufacturing industry. Silver production on the other hand is falling. As a result, prices are looking to breakout into decade highs.

Gold price is at ALL time highs

gold prices are currently trading at all time highs against almost every currency. MTH’s project also has exposure to gold with the current resource containing ~373k ounces of gold.

Mexico top silver and gold producer (and this is in a mature mining area)

Mexico is the largest silver producer in the world, and the 7th largest gold producer. MTH’s project sits in Durango state along the “Sierra Madre Trend” which has produced as much as 6.2 billion ounces of silver - equal to roughly 10% of total global historical production. There are major gold-silver mines throughout the trend, home to multiple large precious metals mining companies.

MTH drilled one of the ASX’s best gold hits in 2021

In July 2021 MTH delivered a gold-silver hit of 8.26m @ 80.3 g/t gold, 705 g/t silver from 468.34m. This was one of the ASX’s top 10 best gold hits of 2021, and drilling will be taking place around this area of the project imminently, a drill rig is on site and ready to go.

Low enterprise value relative to JORC resource

MTH currently trades at an EV per silver equivalent ounce valuation of 27c compared to its TSX and ASX peers which trade in a range of 35c to $1.98 per silver equivalent ounce. Based on the other Mexican high grade exploration/development peer group Mithril's shares could increase 2-4X based on its current resource alone (not including any resource upside potential).

What do we expect MTH to deliver?

Objective #1: Geophysics to rank new drill targets

We want to see MTH run geophysical surveys and identify new drill targets.

Milestones

not done Lidar and magnetic surveys

not done New drill targets ranked

Objective #2: Drilling to extend existing JORC resource

We want to see MTH run several drill programs to extend its existing JORC resource

Milestones

not done Drill permits granted

not done Drilling commenced

not done Drilling assays

Objective #3: Upgrade existing JORC resource

Pending positive results from drilling, we want to see MTH release an upgraded JORC Mineral Resource Estimate with more gold and silver ounces in it. We want to see MTH eventually build its resource up to that ~1M ounce gold equivalent level.

Milestones

not done Release upgraded JORC Resource

Objective #4: Enter feasibility studies

MTH has signalled its intention to enter feasibility studies, which would provide a first pass assessment of the project’s economic viability. As part of the feasibility studies we will be keeping an eye out on the metallurgical testwork MTH completes.

Milestones

not done Metwork results

not done Scoping study/preliminary economic assessment

What could go wrong?

Exploration risk

There is no guarantee that MTH’s upcoming drill programs in Mexico are successful and MTH may fail to find economic silver-gold deposits.

Funding risk/dilution risk

As a pre-revenue small cap company, MTH is reliant on capital markets to advance its projects. If something negative happens at a macro or company level, MTH could struggle to access capital on favourable terms. These capital raises may take place at a discount, and result in the issuance of new shares which incur dilution to existing shareholders - we saw this risk play out in the previous iteration of MTH before it went into suspension.

Commodity price risk

The performance of commodity stocks are often closely linked to the value of the underlying commodities they are seeking to extract. Should silver and gold prices fall, this could hurt the MTH share price.

Technology/substitution risk

Solar (PV) technology could improve such that less silver is needed, or another material such as copper could be used as a substitute for silver. Recycling technology may also reduce long term demand for silver.

Market risk

Broader market sentiment could deteriorate, and shares as an investment class trade lower, taking MTH’s share price with it. Alternatively, there could be further sector specific pain ahead where junior explorers suffer a lot more than the broader market.

Development/delay risk

Should any or all of the above risks materialise, MTH could wind up stuck in “development purgatory” where newsflow dries up and the project remains stagnant for a prolonged period of time, hurting the share price. Additionally, if delays occur in terms of material newsflow, the market could turn on MTH.

Political and geopolitical risk

Despite being a mature mining jurisdiction, operating in Mexico is not without risk. Political sentiment towards mining companies and associated laws may change, making it harder to operate, i.e there may be reforms to mining royalty rates that incur steeper costs for operating mines in the country. Or alternatively, tenure and access permits may not be granted. Additionally, operations in this part of Mexico may be impacted by criminal activity.

What is our investment plan?

We are Invested in MTH to see it expand its resource and progress its project into development (or a takeover)

Our plan is to hold the majority of our position in MTH for 3 to 5 years which we hope is enough time to see MTH to move towards development (see “our long term bet” above).

We will apply our standard de-risking strategy.

We may look to sell up to 20% of our holding if the company delivers on one or more of our Investment Memo objectives and/or the share price materially re-rates.

Any sell downs will be in accordance with our trading and hold policy disclosure.

Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,790,000 MTH shares, 1,895,000 MTH options. The Company has been engaged by MTH to share our commentary on the progress of our Investment in MTH over time.