It is not often that a small-cap mining exploration company lists on the London market, which has on its books two enormous exploration plays targeting potential world-class discoveries. Botswana-based metals firm Kavango Resources is just such a business. The company has already secured a Joint Venture with Rio Tinto (LSE:RIO) for one of its projects and is ready to launch a vast, helicopter-based electromagnetic survey at its other. Given that the firm is only due to float on the Standard List in the coming weeks, it will come to market having already made significant progress in its development.
Kavango was founded by experienced Africa-based mineral explorer Mike Moles, with the aim of using a specialist soil sampling technique to detect mineralisation buried at significant depths below sand cover in Botswana. Having already had spent about $3.5m on its exploration projects to date (including its Rio Tinto funded JV), Moles now hopes to secure enough cash to take Kavango’s biggest project, the Kalahari Suture Zone (KSZ), to the next stage.
The company plans to list on the Standard List of the London Stock Exchange during the first quarter of 2018, raising an expected £2.5m in the IPO. Around £900,000 of these funds will be used to deploy helicopters, which will survey its 7,000km2 licence area in the KSZ with the hope of finding highly-concentrated copper, nickel, and Platinum Group Metals deep below surface.
The firm boasts first-mover advantage at its licences in business-friendly Botswana and looks set to deliver plenty of significant news flow over the coming months. With shares expected to list at 6p each and with 24-month one-for-one warrants exercisable at 12p and half warrants exercisable at 24p over 48 months attached, Kavango has put together a novel financing package to support future growth.
Rock solid opportunity?
The Kalahari Suture Zone (KSZ) is a 450km magnetic anomaly located in South West Botswana. It is a major structural fault in the earth’s crust along which magmas (gabbros) intruded about 180 million years ago. The entire structure and its associated rocks are buried beneath 20 to 30m of Kalahari sand. The zone is currently Kavango’s biggest focus and the firm has already spent around $1.5m on its exploration.
The KSZ was first drilled in the 1980s with Canadian government funding. This was followed up by exploration programs by various Canadian companies in the 1990s. However, the depth of cover and the lack of metal values in the drill-core resulted in the abandonment of interest in the structure for the next 15 years. In 2011, Kavango returned to the area with the intention of using its new soil sampling technique to re-evaluate the zone. It acquired 12 prospecting licences covering well over half the structure
After analysing and re-logging the previously drilled cores, Kavango’s geologists confirmed that there appeared to be two generations of gabbros and that the younger gabbros appear to have intruded into sulphur rich coal shales. The addition of sulphur into the molten magma is known to “scavenge” metals from the melt forming an immiscible sulphide metal liquid, which being heavy, sinks to the bottom of the magma chamber. It was this process that resulted in the barren appearance of the gabbros intersected in the Canadian sponsored drilling program.
According to Moles, the KSZ offers a ‘remarkably similar’ geological setting to the giant Norilsk nickel deposits in Russia. The Norlisk/Talnakh region of Siberia contains the largest nickel deposits in the world.
‘This explains why the rocks appeared to be so barren. Analysis of the whole rock geochemistry shows that the gabbros have been stripped of metals by the free sulphur The challenge now is to find the concentrated metal sulphides in discrete ore bodies’ he said.
Nickel needle in a geological haystack
The potential for these deep, highly concentrated massive sulphide deposits to be present at the KSZ has been backed by a report authored by specialist mining consultants MSA Group. However, they will not be easy to find within Kavango’s extensive licence area.
‘It could take years of painstaking exploration to identify a significant ore body within the 7,000km2 covered by our licences using only ground based geochemical and geophysical techniques. The chances of drilling into an orebody with no other information are extremely small,’ said Moles.
Something more was needed. A solution to the problem – also backed by MSA – is to carry out a helicopter-based electromagnetic survey over most of the gabbros along the KSZ structure. Kavango believes this method will speed up the identification and location of conductors, which may represent massive sulphide ore bodies associated with the gabbros. The airborne EM survey should ensure a steady stream of prioritised targets, which can be followed up with ground geophysics, soil sampling and drilling as they are identified.
Airborne exploration is expensive and Kavango’s current shareholders were unable to fund this next stage of the exploration privately. The solution was to float the company and seek public funding through an IPO and a listing on the LSE. Approximately £900,000 of the funds raised in its IPO would be spent on the helicopter surveying project, beginning in the first quarter of 2018. It will also put aside £500,000 for the follow-up work on the ground once targets have been identified.
Kavango hopes to have made a significant mineral discovery at the KSZ project within 18 months of its listing and prior to further funding requirements.
The entire surveying process is likely to take around four months, a lengthy period from the perspective of an investor in a newly listed resources company. However, Kavango will be able to view details of the conductors identified by the survey at the end of each days flying.
‘Every day the helicopter will come back in from its surveying and we can download all the data and send it to our geophysical consultants in Cape Town. They will take no more than 48 hours to process the data and identify the location and the characteristics of any conductors ing sites which have been discovered on that day’s flying. This would give us a picture of the conductors as they come in and allow us to prioritise them. We can then send out a team to identify the conductor on the ground and assess its depth from surface. If the conductor ticks all the right boxes, we will drill it – straight away’ said Moles.
Kavango’s other large project is the Kavango Copper Project in the extreme North West Botswana. The company currently holds three prospecting licences close to the Namibian border covering 869km2.
The largest and most prospective of these licences is 100% funded and managed by Rio Tinto through a joint venture with Kavango. Rio Tinto has so far spent around $1.5m on sampling, ground and airborne geophysics and drilling on the project, and further drilling is scheduled for 2018. Rio Tinto approached Kavango about a Joint Venture in 2013, just a few months after the latter had acquired the acreage itself. The mining giant had also identified this area as prospective for copper.
Moles was able to negotiate an attractive deal for Kavango which generated some income as well as offer an attractive up-side. As it stands, Rio manages and funds all exploration activity and will continue to do so until the project has reached bankable feasibility. When this occurs, Rio will acquire 90% of the project and Kavango can either fund its remaining 10% stake itself or convert it to a $75m royalty payment. Kavango also receives an option fee, currently worth $100,000 per annum.
‘The Rio Tinto deal was good for us. 2014 was a difficult time for exploration companies and it was hard to raise money. Myself and three others were funding the company out of our own pockets, so to receive these annual payments was a big help. It suited us fine and allowed us to get on with our other projects,’ said Moles.
Moles added that Kavango has already delineated geophysical and geochemical targets for on the other two licences in the Copper Project, which could bear fruit in the future.
While Kavango is yet to identify any reserves and resources, its prospective licences have already attracted mining behemoth Rio Tinto and promises significant upside. This is something the market is unlikely to lose sight of.
Aside from the two main projects, Kavango expects to start drilling at its smaller Ditau Camp Project, situated near the KSZ, just four weeks after it listing. The firm’s geologists have identified a 7km long magnetic body where it expects to locate mineralization at around 150m from surface. Ditau is clearly much smaller than Kavango’s main projects, but the company’s efforts to deliver value-creating news flow to new investors waiting for the first results from the helicopter survey – due in April/May – are worth noting..
With Kavango committed to spending over 80% of the money raised in the IPO on direct exploration, one gets the overall sense that the firm is keen for shareholders to achieve maximum value in the short term. As Moles put it himself: ’Our intention is to give investors genuine value for money. We are not a lifestyle company!’
All these factors, combined with the fact that Botswana is one of the fastest growing economies in the world with a stable, business-friendly government, could create a favourable reaction to Kavango’s market debut.