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Investment Memo:

Megado Minerals (ASX:MEG)

- LIVE

Opened: 17-Feb-2023

Shares Held at Open: 9,740,545


What does MEG do?

Megado Minerals (ASX: MEG) is a junior exploration company aiming to make a critical minerals discovery in North America.

MEG’s main projects are a lithium project in Canada and a rare earths project in Idaho, USA.

MEG’s lithium project is in the James Bay region of Canada - home to a recent major lithium discovery by Patriot Battery Metals (now capped at ~$1.7BN). MEG’s project shares geological similarities with Patriot’s, and investor attention is focused on the region

What is the macro theme?

The US and Canada are making a concerted effort to reshore critical minerals supply chains - this includes lithium and rare earths.

The Inflation Reduction Act (IRA) mandates that 80% of the critical minerals in US-made EV batteries come from US based mines or mines in countries with free trade deals with the US by 2027.

Lithium is critical in the manufacture of EV batteries, and rare earths are used to make the permanent magnets found in EVs and wind turbines and are also found in high tech defence applications.

Rare earths production and processing is currently dominated by China.

We see both lithium and rare earths as part of a decade long investing thematic.

Our Big Bet for MEG Big Bet Tooltip

MEG returns 10x by making a North American critical minerals discovery significant enough to move into development studies, or attract a takeover offer

Why did we invest in MEG?

Right place, right time (critical minerals exposure in North America)

US is planning to spend US$2 trillion over the next 10 years in order to reshore supply chains of critical minerals. Lithium and rare earths are listed as critical minerals as part of the US critical minerals strategy.

Canadian lithium project in the right neighbourhood

MEG’s ground sits along strike to major lithium discoveries made by Patriot Battery Metals (capped at ~$1.7BN), Winsome Resources (capped at $318M).

Similar geology to larger market cap neighbour

MEG sits on top of the same type of rock structures that host Patriot Battery Metals Corvette discovery.

Project has never been explored for lithium

MEG’s lithium project has never been explored for lithium with most of the historical exploration focused on gold. This is despite previous mapping identifying >1km long pegmatite outcrops on projects next to MEG’s. 

Vendor of the MEG project was involved with Patriot Battery Metals, retained as a consultant

The vendors of the assets to MEG are from Dahrouge Resource Management, a related party of Dahrouge Geological Consulting (the company that did Patriot’s exploration work). Dahrouge Geological Consulting will be retained as consultants at MEG’s lithium project and have MEG shares which means they have skin in the game to deliver success for MEG. 

High grade rare earths in carbonatites

MEG’s US rare earths project has multiple carbonatite structures at surface across ~10km of strike. Rock chip sampling across the project has returned grades of up to 17.7% TREO (Total rare earths oxide). Carbonatites are the same type of rocks that hosts $7.6BN Lynas Rare Earths Mount Weld rare earths project. 

Low EV, leveraged to a discovery

MEG is currently trading with a market cap of $11.2M, has $3.5M in cash in the bank trading with a tiny Enterprise Value of $7.7M.

What do we expect MEG to deliver?

Objective #1: Complete target generation works at Canadian lithium project

  • We want to see MEG rank high priority drill targets. 
  • Ultimately we want to see the company identify spodumene bearing pegmatites and define high priority drill targets. 

Milestones

complete Geological mapping

complete Rock chip sampling

in-progress Define high priority drill targets

Objective #2: Complete target generation works at US rare earths project

We want to see MEG put together a list of high priority drill targets. 

Milestones

complete Geological mapping

complete Rock chip sampling

complete Geophysics

complete Define high priority drill targets

Objective #3: Drill program at Canadian lithium project

We want to see MEG drill test the high priority targets identified in Objective #1. 

Milestones

not done Drilling permitting

not done Drilling commencement

not done Drilling results

Objective #4: Drill program at US rare earths project

We want to see MEG drill test the high priority targets identified in Objective #2.  

Milestones

in-progress Drilling permitting

not done Drilling commencement

not done Drilling results

What could go wrong?

Exploration risk

The projects that MEG is working on are early stage projects. As with any exploration company, there is always a chance that after drill testing its targets, MEG returns no mineralisation or uneconomic lithium grades and the project is considered “stranded”. The same risk applies to the drill targets that MEG defines at its rare earths project.

Market risk (macro)

Broader market conditions could change for the worse. This could mean that small cap exploration stocks like MEG suffer from a “risk off” market move.

Commodity price risk

Lithium and rare earths prices could fall, or enter a prolonged downturn. In turn, hurting the economics of any future project that could come from MEG’s drill programs. Even if MEG makes a discovery there is no guarantee that lithium and rare earths maintain their appeal in the market.

Funding risk

As a junior exploration company, MEG will need to seek additional capital to advance the company’s projects. Access to this capital could be impacted by any of the three risks above.

Delay risk

It is possible that there are delays getting permits or weather preventing drilling from proceeding. Any delays with material newsflow can impact a small cap stock like MEG as investors may lose interest as a result of the delays.

What is our investment plan?

After investing in an earlier round as part of the rare earths acquisition, our Initial Entry Price for MEG is $0.039 cents.

As with all our new exploration investments, if the share price runs in the lead up to drilling or on a great drill result (by more than 300%), we will likely de-risk by Top Slicing 20% of our Total Position, in the hope to achieve Free Carry into the remaining drill campaigns.

This is our standard plan across all early stage exploration Investments.

The rest of the Investment plan depends on the outcomes of the company’s drill campaign and will be updated accordingly, and be governed by the 2 to 3 year holding periods as defined in our trading and hold policy disclosure.


Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 9,740,545 MEG shares and 350,000 MEG options at the time of publishing this memo. The Company has been engaged by MEG to share our commentary on the progress of our Investment in MEG over time.

Our Investment Summary

Date of Initial Coverage

17-Feb-23

Inital Entry Price

$0.039

Returns from Initial Entry

-77%

High Point

151%