Mustang Resources fully funded through to October ruby sales

By Trevor Hoey. Published at Jul 20, 2017, in Juniors

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Mustang Resources (ASX: MUS) has secured an A$8.5 million funding facility under an 18-month term convertible note facility (Convertible Note Deed) with a leading US institutional investor, ensuring that it is fully funded through to its upcoming maiden rough ruby tender in October 2017.

The Convertible Note Deed, with convertible notes having a face value of $10 million, has been signed with Arena Investors LP (Arena), a US based institutional investor with more than $600 million in assets under management.

In commenting on this development, Mustang’s Managing Director Christiaan Jordaan said, “The funding arrangement marks another key step in the company’s growth as it continues to recover high quality rubies from its recently upgraded processing plant and ongoing artisanal development program at Montepuez, where its total ruby inventory now stands at ~132,000 carats”.

MUS ruby carat volume

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Jordaan highlighted that this facility ensures MUS is fully funded until the first closed-bid tender of the group’s rubies in October this year, providing the company with the ability to maximise the number of rubies tendered for sale in October.

Jordaan views the funding from an institution of Arena’s size and standing as a significant vote of confidence in Mustang and the Montepuez ruby project. Importantly, achieving this funding agreement minimises dilution for existing shareholders.

Demonstrated success from a high quality ruby rich region

As a backdrop, MUS is focused on the near-term development of the highly prospective Montepuez Ruby Project in northern Mozambique. The Montepuez Ruby Project consists of four licences covering 19,300 hectares directly adjacent to the world’s largest ruby deposit discovered by Gemfields PLC (AIM:GEM) in 2012.

MUS growth projection

Since supply of rubies from sources outside Mozambique has become fractured and unreliable, MUS stands to capitalise on the current demand around the world for ethically produced rubies by becoming a reliable, consistent supplier of high-quality rubies.

Management is currently fast-tracking its work program on the Montepuez Ruby Project with high priority targets being identified and low-cost bulk sampling well underway. First rough ruby sales are scheduled for October 2017 under a closed bid tender of an estimated 200,000 carats gem quality rubies.

Hartleys sees 50% share price upside potential

Hartleys resource analyst, John Macdonald made the following comments this week regarding the quality of rubies typically recovered from the region being mined by Mustang Resources.

“The best Montepuez rubies are often compared to the highest value Mogok stones from Myanmar that have long been in scarce supply in the rough. Gemfields Plc produced and sold rough Montepuez rubies for US$280M revenue from 2014 to 2017. At least an equivalent amount of informal production may also have come out of Montepuez in the same period”.

Ruby market US

Macdonald noted that MUS is the only pure listed exposure to the Montepuez gem field, and the upcoming bulk sampling program could convert seamlessly to commercial operation if successful.

Given this scenario, he has placed a speculative buy on the stock in the expectation that the company will build up a production and sales record in 2017 and 2018.

On this basis, Macdonald has set a 12 month price target of 8.5 cents representing a premium of circa 45% to Thursday morning’s opening price of 5.9 cents.

Hartleys weighs up Mustang’s operational performance to date

Hartleys provided a thorough rundown of MUS’s achievements to date, as well as highlighting the operational aspects of the Montepuez project. The broker noted that the group had developed a 380,000 tonnes per annum processing capacity at Montepuez at a nominal cost of less than $10 million.

Hartleys highlighted the fact that commercial gem operations depend both on ore grades in carats per tonne and average value per carat. The product of the two statistics provides a $/tonne figure which is a more useful number.

The broker postulated that all-up costs in Montepuez might average US$15-40/tonne, depending on a number of factors. At 50 carat/100 tonne (recovered) and US$300/carat (rough), revenue would be US$150/tonne.

Reflecting on MUS’s progress to date, early indications of 50 carat/100 tonne from the June bulk sampling results at 8245L is encouraging in this context, although the tonnage tested is still limited at this stage.

Hartleys also noted that average carat value remained unconstrained, probably in the US$50-700/carat range.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

Where to from here

Montepuez ruby project

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