MC Mining                                         April 18th 2022

Investment Case


Current Market Cap - £19.76 Million
Shares in Issue - 192.78 Million
Predicted 2022 Profit from Uitkomst @$66 Per Tonne x 142Ktpa  - $9.3 Million *

Forecasted Production 2022 - 250,000 Tonnes Uitkomst ROM Coal
Forecasted ROM Coal Sales 2022 - 130,000 Tonnes
Forecasted Middlings Coal Sales 2022 - 12,000 Tonnes

*Taken from RNS 14th March 2022 - · The higher global demand for coal post the COVID-19 pandemic resulted in a significant increase in international prices with an average API4 coal price of $151/t for the Period (H1 FY2021: $64/t); with extraction costs of $85 Dollars


MC Mining remains hugely undervalued.  The poor share price performance now looks to be in the rear view mirror as we move back towards pre covid levels of above 45p a share.  The company had a large seller which suppressed the share price month after month but now they appear to be cleared and funding is being addressed. The future’s looking bright, as a flurry of new investors have raised the share price dramatically in recent sessions & long may this continue.

Financial Review

Financial review

· The loss after tax for the Period was $0.8 million or 0.54 cents per share (FY2021 H1: loss after tax of $2.7 million or 1.80 cents per share);

· Revenue of $13.0 million (FY2021 H1: $8.8 million) and cost of sales of $10.9 million (FY2021 H1: $9.2 million) resulted in a gross profit of $2.1 million (FY2021 H1: gross loss $0.4 million) for the Period;

· Employee benefit expense of $1.2 million (FY2021 H1: $1.0 million);
· Other expenses of $1.7 million (FY2021 H1: $1.3 million); and
· As at 31 December 2021, the Company had cash and cash equivalents of $1.9 million compared to cash and cash equivalents of $1.0 million at 30 June 2021.

Operational Review

· The Uitkomst metallurgical and thermal coal mine (Uitkomst Colliery or Uitkomst) sold 107,953 tonnes (t) of high quality metallurgical and thermal coal during the Period (FY2021 H1: 127,534t);

· An additional 11,655t of high-ash middlings were sold during the Period (FY2021 H1 11,569t);

· The higher global demand for coal post the COVID-19 pandemic resulted in a significant increase in international prices with an average API4 coal price of $151/t for the Period (H1 FY2021: $64/t);

· The Company continues to progress a number of debt/equity funding initiatives to raise the additional funding required to develop the Makhado hard coking coal project (Makhado Project or Makhado);

Corporate Overview

· The Industrial Development Corporation of South Africa Limited (IDC) has provided longstanding commitment to the development of Makhado and has provided a loan of $10.0 million (ZAR160 million) (excluding interest). This funded the progress of the project to its fully-permitted status as well as to partially fund the acquisition of the surface rights over the project area. During the Period, the IDC extended the date for repayment to 31 January 2022 and subsequent to the end of the Period, this was further extended to 30 November 2022.

· During July 2019 the IDC granted MC Mining a conditional $15.4 million (ZAR245 million) term loan facility for the development of the Makhado Project. During the Period the terminal draw down date for this facility was extended from 31 July 2021 to 31 January 2022. The IDC subsequently further extended the terminal draw down date to 30 November 2022, subject to the bank confirming its due diligence.

Further subsequent events

· Completion of the acquisition of the Lukin and Salaita properties, being the key surface rights for the Makhado Project, with the settlement of the deferred balance of $2.6 million (ZAR40.6 million) at the end of February 2022.

· Staged $5.7 million (ZAR86 million) Convertible Advance and Subscription Agreement (the Agreement) with South African-based mining group, Senosi Group Investment Holdings Proprietary Limited (SGIH). SGIH has a successful track record of developing and operating coal mines in South Africa and the transaction is of great significance as the Company moves closer to finalising a funding package to develop the Makhado Project. At the date of the interim financial report, SGIH had paid $2.7 million (ZAR40 million) in terms of the Agreement.

· MC Mining received a notice under section 249D of the Corporations Act 2001 (Cth) from shareholders holding approximately 6.8% of its ordinary shares between them, requesting that a general meeting be held. An extraordinary general meeting (EGM) of the Company has been convened for 11 April 2022 to consider the relevant resolutions.

· Mr Bernard Pryor resigned as Chairman of the Board and long standing Non-Executive director Mr Khomotso Mosehla was appointed as Chairman, pending the outcome of the scheduled 11 April 2022 EGM.

Uitkomst Colliery (70% owned) PRODUCING ASSET

. The colliery comprises an existing underground coal mine, with a planned 16-year life of mine, including the planned extension directly to the north of current operations. Uitkomst sells sized coal (peas) products and a 0 - 40mm product into the domestic metallurgical market for use as pulverised coal.

Abridged summary of JORC-compliant resources statement 30 June 2018

JORC-compliant resources (measured, indicated and inferred)1

 

Gross tonnes in situ (Mt)

Total tonnes in situ (Mt)

Mineable tonnes in situ (Mt)

Uitkomst Colliery

29.2

26.8

25.4

Makhado Project
Makhado Project (95% owned - 69% post-Black Economic Empowerment transactions; Industrial Development Corporation of South Africa Limited (5%)). MC Mining’s flagship Makhado hard coking and thermal coal project in the Soutpansberg coalfield in the Limpopo province is situated 36km north of the town of Makhado and 80km southeast of the Vele Colliery.

Abridged summary of JORC-compliant resources and reserve statement 30 June 2016

JORC-compliant resources (measured, indicated and inferred)1

 

Gross tonnes in situ (Mt)

Total tonnes in situ (Mt)

Mineable tonnes in situ (Mt)

Makhado Project

795.6

691.7

344.8

Vele Colliery

Vele Colliery is a semi-soft coking and thermal coal colliery in the Tuli Coalfield located 48km west of Musina in the Limpopo province of South Africa. The project has been on care and maintenance since 2013 and Vele’s processing plant will be modified to further process the Makhado Phase 1 coal. The Vele plant modifications consist of, amongst others, a new fines circuit comprising a Reflux Classifier in series with the existing spiral plant, low density secondary wash plant and a froth flotation plant to capture the ultra-fine coal. The modified Vele plant will be able to produce HCC and export quality thermal coal simultaneously.

Abridged summary of JORC-compliant resources and reserve statement 30 June 2018

JORC-compliant resources (measured, indicated and inferred)1

 

Gross tonnes in situ (Mt)

Total tonnes in situ (Mt)

Mineable tonnes in situ (Mt)

Vele

794.0

671.3

361.6

Resource and Reserve statement

The presence of hard coking coal and the size of coal's resources, 2.4 billion tonnes in situ, is a differentiating factor from other coal junior mining companies.

Abridged summary of JORC-compliant resources and reserve statement 31 May 2012

JORC-compliant resources

(measured, indicated and inferred)1,2

JORC-compliant reserves

(proven and probable)2

 

Gross tonnes in situ

(Mt)

Gross tonnes in situ

(Mt)

Minable tonnes in situ

(Mt)

Reserves

(Mt)

Vele

795.7

672.9

362.5

325.6

Makhado Project

795.6

691.5

344.4

188.25

Greater Soutpansberg Projects

7,161.0

5,751.5

1,660.0

-

Total

8,752.3

7,115.9

2,336.9

513.85

Makhado - Phase 1 The Next Step!

Makhado Phase 1 is designed to ensure continued scalability

 “MC Mining has announced the development of its flagship Makhado hard coking and thermal coal project through a phased approach”

David Brown, CEO of MCM, comments:

“The approval for the phased development reflects further advancement of Makhado and its ability to generate significant near-term value by positioning MC Mining to be able take advantage of positive future global coking coal prices due to limited supply.

“The use of the existing Vele processing plant reduces the project’s capital expenditure requirements and together with the completed FEED process, shortens the construction time while moderating execution risk.

“The company is in advanced thermal coal offtake discussions with various parties and expects that the marketing and fundraising elements will be completed in early Q3 CY2019.

“The planned commencement of construction later in Q3 CY2019 also reduces the period for delivery of saleable coal to market and generates positive returns for shareholders in the near-term.

“MC Mining remains committed to the sustainable development of the Makhado project, recognising its potential to drive significant socio-economic transformation and seeking co-operation between mining, agriculture and heritage land uses.”

Key highlights:

Background:

The company effectively owns 69% of Baobab Mining & Exploration, the owner of the Makhado Project, the balance being and/or to be held by the Industrial Development Corporation of South Africa Limited, seven communities located in the vicinity of Makhado and a black industrialist.

The development of Makhado will provide significant direct and indirect benefits to these communities located in one of the poorest areas of South Africa.

MC Mining previously announced the Makhado ‘Lite’ project plan, producing 4.0 Mtpa of ROM coal yielding 1.6 to 1.8 Mtpa of saleable product.

The development of Makhado Lite was delayed for approximately one year mainly due to lack of access to two key properties where the east pit, processing and other infrastructure would be located.

The impact of this delay results in, amongst other things, the repayment date for the existing IDC Loan occurring ahead of significant cashflows from Makhado Lite.

Consequently, in parallel with pursuing various strategies to obtain access to the two properties, management assessed alternative project development plans, which included developing Makhado in phases by commencing mining on the west pit and processing through the existing Vele plant (Phase 1) and then progressing to the east pit (Phase 2).

Makhado Phase 1:

The development of Phase 1 fast-tracks the development of a second cash generating asset in the Group, reduces debt/equity funding requirements and significantly reduces execution risk.

The development of Phase 1 was conditionally approved by the Directors of MC Mining in March 2019 and the company has commenced with the various work streams required to satisfy these conditions.

The conditions are:

Finalise thermal off-take

~Q2CY2019

Finalise debt funding ~ $20 million

~Q2CY2019

Raise equity to repay IDC and contribute to Phase 1

funding ~ $30 million

~Q3CY2019

Phase 1 salient features:

Phase 1 commences with the development of the Makhado west pit as well as modifications to the existing Vele Colliery processing plant.

The drilling programme completed in Q4 CY2018 confirms the west pit’s limit of oxidation at 17 m below surface, indicating that the coal deeper than 17 m has not oxidised.

This is shallower than the previously modelled depth of 30 m and translates into a lower strip ratio of 2.08m3/t over the nine-year life of the pit. The approximate 3.0 Mtpa of ROM coal from the west pit will be mined by an independent mining contractor using a truck and shovel, modified terrace mining method.

The ROM coal will be hauled to a crushing and screening plant consisting of a feeder breaker to crush the coal that is then scalped, removing the coarse parting and waste.

The circa 2.0 Mtpa of scalped ROM coal will be transported by road to the Vele Colliery for final processing.

The Vele plant modifications will facilitate the simultaneous production of HCC and a 5,500 kcal export quality thermal coal.

The plant modifications consist of amongst others, a new fines circuit comprising of Reflux Classifier in series with the existing spiral plant, low density secondary wash plant and a froth flotation plant to capture the ultra-fine coal.

The plant will be managed by independent processing experts to produce approximately 1.1 Mtpa of saleable coal comprising 0.54 Mtpa of HCC and 0.57 Mtpa of thermal coal.

Construction at Makhado and Vele will occur at the same time and will take nine months to complete requiring peak funding of R460 million ($33.5 million), including a 10% design contingency.

The Phase 1 construction costs were assessed by DRA Global during a February 2019 FEED process, delivering a +-10% accurate capital estimate, while operational costs were obtained from independent mining, processing and transport contractors, also during February 2019.

The Phase 1 mining and processing will be outsourced to experienced third parties who have previously operated in South Africa and is expected to create approximately 650 permanent employment opportunities.

Offtake negotiations for thermal coal are well advanced. The company is considering various debt/equity funding options with the existing IDC debt of R120 million ($8.3 million), plus interest to be accrued up to date of repayment and Phase 1 capital requirements resolved simultaneously through a composite funding plan.

Phase 1 generates significant cash flows and the project’s IRR is in excess of 45% with a peak funding payback period of less than 2.5 years.

In summary, the key features of Makhado Phase 1 are:

LOM – west pit only

9 years

ROM production

~3.0 Mtpa

HCC production

~0.54 Mtpa

Thermal coal production

~0.57 Mtpa

HCC yield

~19%

Thermal coal yield

~20%

Construction period

9 months

Peak funding

R460 million ($33.5 million)*

Capital expenditure

R400 million ($29.1 million)*

IRR

>45%

Peak funding payback

<2.5 years

* assumes R13.75/$

Makhado Phase 1 is designed to ensure continued scalability and:

  1. is an organically developed second cash generator
  2. achieves the stated strategy of Group attaining self-sufficiency with an estimated peak funding payback period of <2.5 years
  3. delivers strong returns with significantly reduced execution risk;
  4. expedites an accelerated time to market by at least one year compared to the original Makhado Lite, as: