By Dr. Micheal Green

There was good news from Cradle Arc yesterday concerning an extended working capital facility coupled with an operational update. The message coming out loud and clear from this latest announcement is that the board now expects a steady improvement in performance of the Mowana Copper Mine in Botswana over the coming months. Given the current quite ridiculous market cap of less than £3m we can safely say that this is not being even remotely reflected in the stock price.

The back story is that Cradle Arc acquired a 60% interest in the economically-robust Mowana Copper Mine in a cracking deal. This stake was acquired for less than £20 million, with more than US$170 million having been previously invested in the mine to originally get it commissioned. Mining at Mowana has been going well, with benches already created to provide 2 million tonnes of run-of-mine (ROM). It has, as shareholders are acutely aware, not all be plain sailing for Cradle Arc however as the performance of the mill has been problematic. However, recent financings have allowed for the rehabilitation of this processing facility which is expected to lead to a substantial improvement in throughput and recoveries.

Going back to this latest announcement, a US$4 million extension to the pre-existing working capital facility comes from Fujax. Leboam (the holding company for Mowana – in which Cradle Arc has a 60% stake) has entered into an agreement with Fujax to conditionally provide Leboam with a US$4 million extension to its pre-existing working capital facility. The terms are apparently similar to those of the First Advance Agreement which was agreed in February 2017. These funds will be available to be used for the group’s general working capital purposes, which is highly positive as many of the project’s struggles can be put down to it being underfunded.

The operational update brought investors up to speed on the progress that has been made on the ground over recent weeks. Production in October 2018 from Mowana was 140 tonnes of contained copper, compared to management’s original forecast of 392 tonnes. Production hasn’t been helped by the processing plant, which has continued to experience intermittent equipment breakdowns in Q4 2018. Hopefully that should soon all be old history, as the funds received from the drawdown on the US$2 million loan facility in October 2018 have been used to buy essential spares as well as for the repair of key items of equipment. All this action is expected to improve the reliability and availability of the processing plant going forward.

Mowana’s engineering team has been working hard on this installation and repairs to limit downtime. Also, on site, there has been the ongoing rehabilitation of boreholes after severe drought conditions has affected the mine’s water supply causing frequent stoppages. It was also announced that key improvements and rehabilitation works at the processing plant have now largely been completed, with the main outstanding items being a full reline of the mill and continued rehabilitation of the water supply boreholes from the wellfield. Already crushing and filter sections of the processing plant have been repaired and importantly major bottle necks have been removed and so stable production is expected for the rest of Q4 2018.

The end result is that mill availability is improving and now the final concentrate grade achieved during Q4 to date has reassuringly been above forecasted levels. It does look now as though production improvements will becoming through thick and fast. Firstly, a planned mill reline before the end of November 2018 is expected to allow mill throughput to rise to the nameplate capacity of 155 tonnes per hour. Secondly, mining operations have focused on waste stripping in order to increase space in the open pit. Thirdly, test results on the main ore body in the north pit confirmed that around 2 million tonnes of ore are now accessible; and have low levels of acid solubility which are expected to result in copper recoveries of 76% plus.

At the time of this latest announcement Kevin van Wouw, CEO of Cradle Arc, was able to point out that the extended working capital facility from Fujax was a vote of confidence in the Mowana operation which will help ensure that the team have sufficient headroom and contingency as management seeks to build upon the stabilised operations and recommence production ramp-up. Kevin also mentioned that the “..implementation of the previously announced key improvement and rehabilitation works at the processing plant has now largely been completed, with the main outstanding items being a full reline of the mill and continued rehabilitation of the water supply boreholes from the wellfield 7km from the mine.  Accordingly, with the ores available for processing and operations at Mowana on a more stable footing, we expect steady improvement in performance of the project over the coming months.”

To us, it does all looks as though finally it is now coming together at Mowana after the delays and disappointments since the relist earlier this year. Quality projects like Mowana require a decent level of funding to be successful and we believe that market conditions at the time of the relist precluded Cradle from raising the necessary level of funds in a timely fashion to really do the job properly. It does seem that the latest financing deals over recent months have finally served to give the management a proper chance of success. 

The team knows the mine and the plant well and so the US$2 million which has recently been invested in a way which will provide a solid base on which to build production. The company is currently not putting any forecasts out into the market, until production reaches a steady state with regular updates thereafter once this has been achieved.

The stock has been under substantial pressure over the course of this year due to the production difficulties and which have whittled the share price down to a derisory level. We believe that Mowana is now on the cusp of deliver with management aligned with shareholders through Kevin Van Wouw’s large stake. As painful as it has been to have these problems decimate the stock price for existing shareholders, for those able to average down or new shareholders  we thus reiterate our Conviction Buy stance and expect these to be a major outperformer in 2019.

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