We come across a lot of companies on a daily, weekly and monthly basis and whilst most stories are either uninteresting or uninspiring, there still are a lot of interesting stories in this market. And some stories aren’t just ‘interesting’ but exciting, and after Cancana Resources (CNY.V) most recent update, we are now extremely excited about its manganese project in Brazil (‘BMC’ or ‘Brazil Manganese Corp’).
As you might remember from our Q&A report, Cancana currently owns a 28% stake in the BMC JV with Ferrometals, a Sentient vehicle, owning the balance. When discussing the BMC project in this report we are referring to the BMC JV on a consolidated basis.
Recent results from Cancana’s manganese JV are proving the geological model.
Cancana and Ferrometals got their hands on a small-scale producing Manganese project which should be able to produce 20,000 tonnes of manganese per year. As Cancana’s product had an average grade of 53% Manganese in 2014, it was the highest grade manganese mine in the entire world and even inside Brazil the competition is just limited as the second highest grade mine is producing manganese at a grade averaging 46%. Still very respectable, but it doesn’t meet the same standards as Cancana’s premium product.
As we explained before, Cancana’s manganese is being used in fertilizer in the agricultural sector because not only does the BMC-manganese contain a high level of Manganese oxide, the level of impurities is also extremely low, making Cancana’s production amenable to be applied as fertilizer.
The procedure is pretty simple. BMC’s manganese is a micronutrient that is being blended with other micronutrients to be applied along the traditional NPK fertilizers. In order to be used in the agricultural sector, the average grade of the Manganese has to be in excess of 48% and the level of impurities has to be very low for the best results.
This puts the company in a very interesting position as Brazil has been struggling to secure a reliable supply of high-grade manganese despite the fact its soybean sector really needs it as soybeans are particularly affected by low-manganese soil.
Cancana was already producing relatively small amounts of Manganese to get familiar with the production process and to have a certain cash inflow to cover its overhead expenses, but the strategic plan at BMC is to define a multi-million tonne resource estimate at an average grade of in excess of 50% Mn. Cancana is the first company that has been able to consolidate a huge 100,000 hectare land package (in excess of 1000 square kilometers), and has been the first company to conduct modern exploration on the property with for instance the first ever aerial survey. After exploring 61% of the land package, Cancana’s aerial survey discovered no less than 62 areas of interest.
Exploration targets were popping up on the map like a Christmas tree, and Cancana was in the luxury position to cherry-pick which targets it would follow up on first as the survey highlighted a total strike length of approximately 211,000 meters (yes, 211 kilometers). 38 holes have now been completed in almost 2,100 meters, resulting in an average depth of approximately 55 meters per hole. This does sound shallow, but keep in mind these veins could be relatively narrow (although a lot more exploration will be needed and it’s not unlikely the veins are wider than we originally assumed) and we don’t expect these veins to remain economic at a greater depth. Fortunately Cancana also realizes this and is focusing on the first 40-50 meters from the surface as this will keep the strip ratio limited.
What should you remember from Cancana’s exploration results?
First of all, the geological model has been confirmed and the aerial survey has been a tremendous help to define new exploration targets and this has really highlighted the total potential of this project.
Why is that? Even though a part of the manganese mineralization is located in so-called breccia zones and are yielding a lower grade result, the company has confirmed the tenor of the mineralization hasn’t changed. That’s important, extremely important, because it means that it will be perfectly possible to maintain the high-grade end-product as the manganese could easily be separated from the host rock. And of course, more metallurgical testing will be necessary, but if the breccia zones could indeed easily be mined and processed, then all bets are off.
Cancana will soon start testing the dense liquid method to recover the manganese. During this process, the ore gets crushed and poured into a vat with dense liquid and the heavier manganese will sink to the bottom whilst the lighter silicate will raise and float on top of the liquid (this is currently being tested at the lab in Florida). There definitely isn’t any rocket science involved in recovering the manganese, and that’s one of the reasons why we like the property and value proposition a lot. The dense liquid method is already being used in lots of other mining projects, so the procedure is quite well-known and well-documented.
Do you need another reason? Let’s make a back of the envelope calculation to find out how much. The total strike length is 211,000 meters on 61% of the property, and the drilling has confirmed the aerial survey has been very useful. Let’s now for simplicity’s sake use 150,000 meters of strike length, a vein width of 1.5 meters and an average depth of 40 meters, and suddenly you have a total potential resource of 28-30 million tonnes. Of course, this is just a very basic back-of-the-envelope calculation and there are a lot of factors that will determine the outcome, but the world-class potential is here, and Cancana’s aim to develop a 1 million tonne per year operation at the BMC joint venture could be validated, but a lot more drilling will be needed to get to this pivotal point.
There’s nothing blocking an expansion to 50,000 tonnes per year now – but the company will need more cash
Ausenco has completed its study at the Jaburi plant and has confirmed only a few minor tweaks are needed to more than double the output at this plant from 20,000 tonnes to 50,000 tonnes. All it would take the project to ramp up its production is to incorporate some equipment updates and connecting the plant to the existing power grid. Ausenco hasn’t provided an estimated capital expenditure for the expansion, but we can’t imagine the updates costing more than US$5M and probably even less than that.
This obviously means the company will have to raise some cash. First of all, it would need to contribute US$2.8M to the BMC joint venture as a catch-up payment to reach a 40% stake in the JV-co. As Cancana doesn’t have this kind of cash right now, it will very likely have to raise C$4M in the next few weeks. As the cash will be contributed into the BMC joint venture (and not being paid to Ferrometals), this injection will take care of a large part of the capex needed for the expansion, meaning Cancana could only be on the hook for 40% of the potential capex funding shortfall (assuming the capex is indeed $5-6M and not lower as our estimates are quite conservative).
And there’s no reason why Cancana wouldn’t increase its stake in the joint venture to 40% as all funds will be used to upgrade the plant. Right now, at 20,000 tonnes per year, Cancana’s operating cash flow covers the ongoing general and administrative expenses and the company will be roughly breaking even. However, as Cancana would like to continue to explore after the excellent first pass over the property, it will need to generate more cash flow to spend it on exploration.
Based on the limited information and data we currently have, we are expecting Cancana’s operating margin to be approximately US$100/t (assuming the company will continue to receive a 30% premium over the benchmark price due to the exceptional quality of its ore), and by boosting the production rate to 50,000 tonnes per year, Cancana could generate as much as $2.5M per year to be spent on exploration to find out how much manganese BMC really contains.
Exploration will be an important part of Cancana’s strategy to create shareholder value as the company is determined to prove up a sizeable resource at the Brazil Manganese project. It continues to refer to the Australian Woodie Woodie project which was sold for in excess of 1 billion dollars, despite still having a resource estimate of just 50 million tonnes at less than 32% Mn.
Of course, times have changed and right now there isn’t as much capital available for mining projects as there used to be, but keep in mind Cancana’s project contains Manganese in exceptionally high concentration earning a premium over the benchmark price.
Investment thesis
Cancana and Ferrometals could really have hit the jackpot here because the exploration program has confirmed the geological model and all the BMC joint venture needs to do now is to continue executing its exploration plan in order to define a first NI43-101 compliant resource estimate at BMC. We were originally hoping to see the maiden resource estimate by the end of this year, but now we’re aiming for H1 2016 to see an inferred resource estimate.
There might be some near-term pressure on the company’s share price if it wants to increase its stake in the BMC JV to 40%, but in the longer run, this temporary pain will definitely be worth it. If the market would have been any better, the share price wouldn’t be trading at C$0.23 but at in excess of a dollar.
Cancana is still focused on the prize and its methodical approach will undoubtedly pay off.
Disclosure: Cancana Resources is a sponsor of the website. We hold a long position. Please see our disclaimer for current positions.
