Contango Holdings (LON:CGO) engages in the production, development and sale of natural resources to local and international consumers in the Sub-Saharan Africa region. Founded in 2016, the UK-based company has expanded its operations significantly since its formation and began trading on the London Stock Exchange in the summer of 2020.
In recent years, two main resource projects have taken centre stage at the forefront of Contango’s business development: the Lubu Coal Project and the Garalo-Ntiela Project. The success of these projects will play a crucial role in determining whether Contango will continue to increase its value, or if the company suffers financial and economic losses in the short-term.
The Lubu Coal Project
Contango has a 70% interest in the Lubu Coal Project in north-western Zimbabwe, with the remaining 30% held by supportive local partners. Prior to Contango’s involvement in the project, previous owners had invested over $20 million, enabling sizable coal resources in excess of 1.3 billion tonnes to be identified.The company describes the project as a high value coking coal project with near term production potential. This is largely driven by the fact that the Lubu Coal Project covers almost 20,000 hectares of the highly prospective Karroo Mid Zambezi coal basin whose extraction capacity is vast. The coal seams within Block B2 of the basin are from surface down to a maximum depth of 47 metres, enabling operating costs to be kept at very attractive levels for the business.
In the longer term, Contango may look to expand its operations in the Lubu Coal Project to fully develop the coal field in an attempt to exploit thermal coal opportunities.
The Garalo-Ntiela Project
In addition to the Lubu Coal Project, Contango is also involved in the Garalo-Ntiela Project, located in Mali. The project occupies over 160km2 worth of land, and is surrounded by several multi-million ounce gold deposits, with the region being home to some of the world’s leading gold miners (AngloGold Ashanti, IAMGOLD, Barrick) which has helped to establish Mali as the third largest gold producer in Africa.
Factors including the excellent infrastructure in the vicinity, historical exploration and the deposit’s surface location have meant Contango is becoming increasingly confident the mine can be brought into production at the end of the current quarter. The company predicts initial production to be around 10,000 ounces of gold per annum, but it is looking at the potential of sourcing a further $4 million through non-equity capital providers to increase production to a rate of 30,000 ounces per annum.
In this context, it is likely that the official commencement of the Garalo-Ntiela Project will further improve Contango’s economic position.
So what are Contango’s investment prospects?
With the Lubu Coal Project and Garalo-Ntiela Project representing such a significant proportion of Contango’s investment outflows, the financial success of the company and thus its investment prospects are highly dependent on the outcome of these ventures.
There are certainly some promising signs for the projects, but retail and institutional investors should consider the inherent risks attached to them before deciding whether to purchase Contango Holdings stock, which currently sit at 7.20 pence per share. These risks primarily come in the form of higher than expected extraction costs and reductions in the market prices of natural resources.
