Power Metal Resources: Unlocking Haneti’s transformational potential

LSE:POWAugust 2019

IntroductionEarlier this year, Power Metal Resources added Tanzania to the growing list of African countries where it is exploring for the key battery metals powering the electrification of the world. The company entered an option to buy up to a 35pc position in a project owned by AIM-listed Katoro Gold (LSE:KAT) called Haneti that is thought to be prospective for both nickel and lithium.

Together, the two businesses have pooled their collective experience to launch immediately into an accelerated programme of work designed to inform a drilling campaign at Haneti. Here, Power Metal’s executive chairman Paul Johnson, who joined alongside chairman Andrew Bell as part of a restructuring earlier this year, explains why he thinks this work could be ‘transformational’ for the firm.

Following a period of due diligence, Power Metal announced that it had indeed decided to exercise its option in May. Katoro’s shareholders subsequently approved the issue of equity for the transaction, and the two organisations moved to form a joint venture (JV).

Power Metal’s engagement with Katoro Gold (AIM:KAT) began in March 2019 when it purchased a c.1.56pc equity stake in the AIM-listed exploration and development company for an initial £25,000. Alongside this, the business was also granted a 60-day option to buy another £75,000 worth of Katoro shares (to take it to a 5.95pc position) alongside a 25pc direct interest in its Haneti nickel project (Haneti). Finally, the option gave Power Metal the right to increase its Haneti stake to 35pc by paying another £25,000 within 12 months of exercising its option.

Increasing Stakes

Based in Central Tanzania, Haneti is a nickel sulphide project made up of near-contiguous tenements covering around 5,000km2 of land. Much of the project lies on top of a highly-prospective belt of rocks called the Haneti-Itsio Ultramafic Complex (HIUC), which is made up of metamorphosed ultrabasic rocks like dunite and peridotite called serpentinites.

With most of the HIUC’s outcrop exposure in the Haneti block occurring 15kms east of a local village, artisanal miners exploring for nickel-stained mineral chrysoprase have been the area’s most active players to date. However, interest has been increasing since the recent discovery of a bordering greenstone belt called Londoni that extends southeast into the project. Here, Shanta Mining (LSE: SHG) has published a resource of c.1MMoz gold at a grade of 1.5g/t from several small prospects over a 6km strike length.

Nickel Sulphide Opportunity

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In that sense, Katoro, and now Power Metal Resources, are privileged to have access to this opportunity. Given that Power Metal Resources’ key strategic objective is to make large scale metal discoveries, we feel that, with Haneti, working alongside Katoro, we have a real opportunity to make such a discovery.

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Haneti’s location in Tanzania

Before Katoro or Power Metal’s involvement at Haneti, previous owners such as Kibo Mining (LSE:KIBO) had completed around $1.5m worth of exploration work. These efforts identified strong prospectivity for nickel in the block across four key drill-ready targets along with additional gold, cobalt, platinum credits, and some significant lithium anomalies. The most prospective of these sites is Mihanza Hill, which sits within an 80km-long ultramafic zone known as ‘the central zone’ and has returned grades of 13pc nickel and 2.33 grams per tonne of palladium and gold.

Beyond these efforts, additional, independent work by Western Geophysics proposed that Haneti could host a significant nickel sulphide deposit. Likewise, the Geological Survey of Tanzania completed a high resolution airborne geophysical survey covering c.12,000km2 between 2012 and 2013 that extended the footprint of the project’s known nickel sulphide-prospective belt.

After acquiring Haneti in November last year, Katoro immediately began a review of all the historic work completed on the block. This led it to the exciting conclusion that the asset may host a chonolith-type nickel sulphide deposit. Johnson tells us that large-scale nickel sulphide targets of Haneti’s nature are not usually accessible to smaller junior resources companies.

HANETI

TANZANIA

► Border measures 945,040km2 and population sits at around 52.5m people

► Bordered by Kenya, Uganda, Rwanda, the DRC, Burundi, Zambia, Malawi, and Mozambique

► Admin capital Dodoma is based near centre of country and financial centre Dar es Salaam is near the coast

► Stable political environment since mid-80s, with elections and transitions progressing peacefully

Tanzania at a glance► Legal system is based on English common law

► Gold accounts for around 21pc of all exports

► Natural resources include hydro-electric, coal, iron, gemstones, gold, uranium, natural gas, nickel, diamonds, crude oil, forestry, wildlife, and fisheries

► Among highest African exploration levels due to prospectivity, political stability and investor-friendly policies

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Katoro’s focus this year is to establish whether disseminated or massive sulphide mineralisation exists across Haneti’s key targets, with a particular emphasis on Mihanza Hill. It expects this work to help it in defining a subsequent drilling programme.

Power Metal’s arrival has enabled Katoro to accelerate these efforts considerably. Indeed, the pair not only agreed that Katoro will allocate all the money it received from Power Metal towards Haneti, but also that Power Metal will now fund 25pc of project costs. Likewise, the deal also ensures that Haneti will benefit from the combined management skills of both Power Metal and Katoro throughout its future development.

Indeed, Katoro’s executive chairman Louis Coetze has over 25 years of experience in business development, promotion, and financing in both the public and private sectors. He also has a great deal of expertise in the exploration and mining arena, currently sitting as chief executive of Kibo Mining (LSE:KIBO). Likewise, the firm’s board includes Louis Scheepers, former CEO of Mzuri Exploration Services, Paul Dudley, co-founder of corporate advisor HD Capital Partners, and Tinus Maree, founding principal of River Group.

Katoro’s boardroom experience complements that of Power Metal, which underwent a successful refinancing and strategic review earlier this year under new managers Johnson and Andrew Bell earlier this year.

Johnson is an experienced public company director who has previously served as CEO of Metal Tiger plc (LON:MTR), Metal NRG plc (LON:MNRG), and China Africa Resources plc (LON:CAF). He has also been chairman of ECR Minerals plc (LON:ECR) and non-executive director of Greatland Gold plc (LON:GGP), Papua Mining (LON:PML), and Thor Mining plc (LON:THR). Meanwhile, Andrew Bell, who works as Power Metals’ chairman, has worked in natural resources since the 1970s. He is perhaps most recognised as chairman of Red Rock Resources (LSE:RRR), a non-exec director of Jupiter Mines (ASX:JMS), and a former non-executive chairman of Greatland Gold (LSE:GGP).

This bolstered management presence and financial firepower have already enabled Katoro and Power Metal to deliver plenty of news from Haneti since their engagement. Firstly, towards the end of May, the pair revealed that 1,500 soil samples from the

Getting to Workproject had extended the strike length of its existing exploration targets and well as identifying an entirely new target. Following this, in June, the partners revealed that they had decided to carry out a drill programme on two of Haneti’s key targets – Mihanza Hill and Mwaka Hill. This decision came after 3D modelling on a magnetic anomaly at Mihanza Hill.

Finally, in July, Katoro and Power Metal announced that they had identified several pegmatite outcrops within two abandoned artisanal pits at Haneti during exploration work. These were found to contain coarse quartz, red and black tourmaline and- most critically- lepidolite - which contains significant amounts of lithium. These results indicate that lithium minerals such as spodumene and petalite – as well as rare earth elements like tantalite-columbite – may be present at Haneti. As such, the pair have applied for new exploration licences covering zones of interest and are developing a work programme to identify any lithium-bearing minerals and assess the extent of any lithium mineralisation. Johnson says progress at Haneti is now continuing at pace:

Macro conditions and the challenging financing market have slowed many exploration firms down with their projects. Not so with Haneti, where a number of initiatives have already been undertaken in 2019 and where a drill programme is due to be undertaken to test mineralisation. The project is moving forward at pace because both companies realise that a discovery of a major nickel sulphide deposit would be business transformational. We are eager to get on with exploration as a result.

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Metals and materials demand from lithium-ion battery packs in passenger EVs

2018 2019 2026 2027 2028 203020292021 2022 2023 2024 20252020

Thousand metric tons

Manganese

Lithium

Cobalt

Nickel

Graphite

Aluminium

Copper

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Source: Electric Vehicle Outlook 2018 – Bloomberg New Energy Finance

With its strong nickel prospectivity and potential lithium mineralisation, Haneti bolsters Power Metal’s exposure to two metal markets that are widely expected to favour operators over the coming years.

The commodities are among several being hailed as ‘new precious metals’ thanks to their use in the next generation of batteries. Although these batteries have a variety of potential applications, the one that is most likely to create value moving forward is electric vehicles (EV).

The world’s fleet of EVs grew by 54% to about 3.1m in 2017 and is expected to hit 125m by 2030, according to the IEA. Likewise, JP Morgan forecasts that EVs will account for 30% of all global vehicle sales 2025 – this compares to 1% in 2016.

Growing MarketThe majority of these EVs are expected to use different variations of what are known as Li-ion batteries, formed from the combination of lithium compounds with other materials. Obviously, all of these batteries contain some amount of lithium, creating a favourable future demand dynamic in the market for Power Metal and Katoro if Haneti is found to contain quantities of the metal.

However, with around 58% of Li-ion batteries expected to contain nickel by 2025 – up from 39% in 2016 – Wood Mackenzie expects supply constraints to also force the price of the metal up to $28,700/t by 2022. Indeed, demand for the metal has now outstripped supply for several years, helping to reduce stockpiles from around 500,000ts in mid-2016 to fewer than 200,000ts today.

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Batteries represent fastest-growing segment of the rapidly

expanding energy storage market

The scale of growth in lithium-ion battery manufacturing has led to questions over whether

there will be enough basic materials to meet demand.

Concern centers on five materials in particular: lithium,

cobalt, nickel, graphite and copper

Global lithium-ion battery cell production expected to increase

from 109 gigawatt- hours in 2017, with most units serving

the consumer electronics market, to 523 gigawatt-hours

by 2025, underpinned by demand from the EV industry

EV Batteries - The Supply/Demand Story

We feel that the power metal space is likely to deliver a number of commodities with a robust pricing profile as the impact of subdued supply and increasing demand come into play. In the case of nickel, its increasing utilisation in battery products and the growth in the utilisation of battery technology will provide a very strong investment case going forward. Falling nickel stocks and the recent strength in the price of the nickel commodity are early indicators of the potential growth in the nickel exploration and development space.

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The positive impact of this trend was thrust into the spotlight as recently as July when nickel hit $14,090/t, -its highest price in a year- after major player Indonesia threatened to reinstate an export ban on ore from 2022. As of mid-July, the metal had risen 30pc year-to-date - in comparison, copper was up only 1.2pc, and aluminium had gained only 2.5pc. The metal has since risen even further and is currently trading at just under $15,000/t. Johnson expects nickel’s outperformance to continue moving forward:

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TANZANIA

LAKE VICTORIA

IMWERU

HANETI

• 515,000 oz @ 1.38 g/t• 100% owned by Katoro Gold

LUBANDO• 239,870 oz @ 1.10 g/t• 100% owned by Katoro Gold

TANZANIA

MWANZA

Wider ExposureHandily for Power Metal and its investors, the direct position taken by the firm in Katoro allows it to enjoy exposure to the upside on offer across Katoro’s wider portfolio of exciting exploration assets. Johnson says Power Metal was keen to get direct exposure to the firm in the wake of recent strength in both gold and nickel prices.

Beyond Haneti, Katoro owns a gold project called Imweru that is based in Tanzania’s Lake Victoria Goldfields region. It contains a mineral resource of 11.607Mt grading 1.38 g/t for an impressive 515,110oz gold. Katoro has commenced a definitive mining feasibility study on the project, where it is targeting initial production of 50,000oz and a mine life of between seven and ten years.

Likewise, the organisation also owns a second Lake Victoria Goldfields-based project called Lubando, which sits just 75km directly southwest of the city of Mwanza. Although it is still at the early stages of development, Lubando is thought to contain a 6.78Mt resource at 1.1g/t for 239,870oz of gold.

Source: Katoro Presentation

We think that there is strong chance that prices will continue to grow and, therefore, Katoro Gold with its dual gold and nickel focus seems to be a very good investment option. Power Metals has exposure to 5.9pc of Katoro through the 10m shares it owns already and a further 10m warrants at 1.25p just above the current share price. We consider there is real potential for the share price of Katoro to rise significantly. which of course will benefit the balance sheet of Power Metal Resources.

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“Location of Katoro’s Imweru and Lubando Projects

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Source: Company presentation

At the end of July, Katoro rose by nearly 15pc after revealing that it had received expressions of acquisition and joint venture interest in Lubando and Imweru. The business, which said the approaches indicate a ‘clear appreciation’ of the projects’ value, is now investigating the scope and cost for further exploration work. It hopes that this work can result in an initial one-million-ounce resource target across the two assets.

In combination with Haneti, Power Metal’s Katoro investment will complement its existing portfolio of interests, which Johnson and Bell have reviewed and expanded since entering the business earlier this year. Indeed, the project will sit next to the firm’s long-term copper-cobalt interest in the DRC and its cobalt-nickel interest in Cameroon, where management has committed to continuing their predecessors’ work.

The majority of these EVs are expected to use different variations of what are known as Li-ion batteries, formed from the combination of lithium compounds with other materials.

With around 58% of Li-ion batteries expected to contain nickel by 2025 – up from 39% in 2016 – Wood Mackenzie expects supply constraints to force the price of the metal up to $28,700/t by 2022. For comparison, it is currently priced under $12,500/t.

Map of Power Metal’s Active Jurisdictions

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Importantly, Power Metal will develop Haneti alongside a project called the Molopo Farms Complex (MFC), which consists of three exploration licences spanning 2,725km2 in southern Botswana. Power Metal has secured an 18.26pc position in Kalahari Key, the MFC’s current owner, as well as entering a deal that gives it the right to buy a 51pc effective economic interest in the asset by 31 December 2019.

The pair are primarily targeting nickel and platinum mineralisation within a geophysically-delineated,

Summarising, Johnson tells us that Haneti brings yet another potentially game-changing opportunity into Power Metal’s already-exciting portfolio of interests.

Transformational Potential

At present, Power Metal Resources has four active operations in four countries. In Botswana we have nickel exploration interests, in Cameroon cobalt interests, and, in the DRC, copper and cobalt interests. All the operational projects have at their heart large-scale targets, and Haneti is exactly the same. As with the other project interests, it brings near-term discovery potential and, if a large-scale discovery is made, it will be transformational for the countries in which we operate, for our company, and for Katoro. Most importantly, it will be transformational for all our shareholders.

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major shear/feeder zone at the asset. However, they will also seek to identify massive or disseminated nickel sulphide deposits at the base of, or within the project’s ultramafic zone.

Author: Daniel Flynn

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