Mkango Resources

Update on Recent Developments

Mkango Resources (MKA.L), 10.0p, £32.7m market capitalization

Background reading:

Mkango Resources - Introductory Note

Although the share price has dipped 9% since I published my introductory note on Mkango three weeks ago, there have been a number of positive company-specific updates – as well as positive industry developments – in the period.

Firstly, formal RNSs. On 17 February, the company announced that its wholly owned subsidiary, Mkango Polska Sp. Z.o.o, had “signed a revised exclusive land lease agreement with Grupa Azoty Pulawy – the second largest producer of nitrogen multi-component fertilizers in the EU – for the construction of a strategic rare earths separation plant in Poland. The Agreement constitutes a continuation of cooperation that the parties first started in 2021.”

The original agreement of this was set out in an RNS dated 7 June 2021. However, from mid-2022, updates on project development ran dry. I suspect this was due to a combination of rare earth prices falling hard (from its peak in early 2022 to its trough in early 2024, neodymium declined by over 70%); Pulawy being located relatively close to the border of war-torn Ukraine; and Mkango determining to focus its limited resources on its most promising asset, HyProMag (a sensible move, during a period of low prices).

It was therefore very encouraging to see this update, particularly so on the back of the 8 January RNS, in which Mkango announced a Letter of Intent had been signed with Crown Proptech to list the Songwe Hill and Pulawy Rare Earths Projects on NASDAQ via a SPAC Merger.

In my view, completing this revised land lease agreement that will enable the build of the separation plant in Poland, will have been a key requisite for the SPAC Merger deal to progress.

I retain the view set out in my first note, that the combined Songwe Hill and Pulawy assets will command an enterprise value of in excess of $100m, equating to a net asset value per Mkango share of >24p. I believe that Mkango will update the market on deal progress – including, I believe, a valuation – at some point this month.

On 28 February, Mkango released another RNS, which confirmed that the three executive directors all continue to take a significant portion of their salaries in shares. This compensation structure was arranged in H1 last year, when the company was running on fumes. Given that the company now has sufficient liquidity following its £2.3m equity raise last month, management could have reverted to salaries being paid on a 100% cash basis. That they have not is, for me, a big positive, as it suggests that they see significant upside to the current share price.

Finally today, in conjunction with its US partner, CoTec Holdings, Mkango announced the results of an independent Product Carbon Footprint (‘PCF’) analysis for the HyProMag USA operation. It affirmed that HyProMag “has the capacity to provide the US with the lowest carbon domestic source of permanent magnets”. It suggested that, compared to an NdFeB magnet manufactured using primary feedstock (i.e. neodymium sourced from mining activities), HyProMag magnets boasted a significantly lower carbon footprint with an approximate 95% reduction of CO₂-equivalent emissions.

Standout management comments from the RNS were:

“Revitalizing of US rare earth permanent magnet production, metallization, and skills development, (is) a strategic priority for the US Government.”

“HyProMag has the opportunity to transform rare earth magnet supply chains in USA, Europe and Asia.”

Note the ‘Asia’ reference, which suggests that HyProMag’s plans with its Japanese partner, Envipro, could be progressing well behind the scenes.

Whilst ESG credentials may not be as high up on the list of priorities for projects as they were in recent years (notably in the US!), the simple fact is that a substantially lower energy requirement will result in a significant reduction in cost of production.

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Over the past weeks, two presentations have aired that have included details of the HyProMag operations. Firstly, CoTec – the minority shareholder in Maginito and the 50:50 joint venture partner with Maginito in HyProMag USA – carried out an investor presentation. I have copied below what I think are the key highlights:

“We have this very high barrier to entry, because we have the patented technology, which we believe is by far the best currently in the world for the recycling of permanent magnets.”

“It’s a modular technology. So the target for us is to expand this (i.e. the circa 1,000 tonne per annum plant in Texas) and to have more than one plant. We’re currently thinking that we could potentially put our plants where we have our collection depots in South Carolina as well as in Nevada, which would allow us to meet about roughly 10% (currently circa 3,000 tonnes per annum) of the supply for permanent magnets in the US.”

“We have had numerous discussions with potential offtakers, potential suppliers. Those are of critical importance in the recycling industry and the reception there has been really good, so we’re in the process of advancing those discussions.”

“On the financing side, we have approached the US government for grant funding. Those discussions are also ongoing, and that’s also going exceptionally well.”

The second presentation was on the recycling of permanent magnets in Europe. One of the speakers was Carlo Burkhardt, a co-founder of HyProMag Germany. For me, the key highlight was that, whilst the current development plan is to launch an initial 100 tpa operation by year end, the second phase of development will scale the operation to 500 tpa. Prior to this, it had been stated (at least, by Mkango itself) that the goal was to scale up to only 330 tpa. A 52% increase in targeted nameplate production to 500 tpa suggests that management is confident that there is no shortage of both supply and demand in Germany and surrounding nations, that would be necessary for the operation to grow to such a size.

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The term “rare earths” has been in the global headlines the past two weeks, notably with regards to the US and Ukraine’s much touted critical minerals deal. For context, the deal proposes an investment fund owned 50/50 by the US and Ukraine, into which Ukraine would pay 50% of all revenues earned from the future monetization of natural resources owned by the Ukrainian government. In theory, the fund would invest in Ukraine’s postwar reconstruction and economic development.

For those readers concerned that US access to Ukraine’s minerals might diminish the necessity for Mkango’s rare earths assets and recycling operations, let me set your minds at ease: Ukraine does not have any rare earth element deposits at advanced stage of development, such as Mkango’s Songwe Hill. The use of the term “rare earths” by both the Trump administration and by the mainstream media is a misnomer: they are broadly referring to critical metals, such as lithium, titanium, graphite, uranium, etc. (some of which Ukraine does actually boast large reserves of) – but not explicitly to rare earth elements such as neodymium and praseodymium.

The saga has in fact been a positive for Mkango (and other American, European and African rare earth element players) in that it has highlighted to the world just how desperate the US is to establish ex-China sources of critical minerals. And the minerals required to manufacture NdFeB magnets – neodymium, above all – will be near or at the very top of that list of critical materials.

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There has also been further heat in the US-China trade war this past week, with the Trump administration having increased the blanket tariff on Chinese goods from 10% (which went into effect four weeks ago), to 20% yesterday. Clearly, this will prove a major positive for US-based manufacturers of NdFeB magnets such as HyProMag USA. Consumers of NdFeB magnets in the US will very likely choose to purchase US-made, tariff-free magnets over China-made magnets – on which they will now be required to pay a 22.1% tariff (including the existing 2.1% tariff on all goods from non-preferential trade partners, of which China is (obviously!) one).

Moreover, it’s important to note that in September 2024 under the Biden administration, a specific tariff on China-made NdFeB magnets – set at 25% – was enacted, which comes into effect from 1 January 2026. It is as yet unclear as to whether these tariffs will be stacked (which would effectively increase the tariff that US consumers must pay on China-exported NdFeB magnets from the new base of 22.1% as of this week, to 47.1% as of the beginning of next year). If they are not stacked, I believe the highest applicable rate will be applied (i.e. 25%). In any event, HyProMag USA’s offering will be highly attractive to US consumers.

From a political perspective, the hike of the blanket tariff from 10% to 20% this week on Chinese exports to the US will only serve to exacerbate relations between the superpowers. One of China’s trump cards is in limiting or even completely cutting off exports of processed rare earth products, especially NdFeB magnets. Consider this: global production / consumption of NdFeB magnets is currently approximately 250,000 tonnes per annum. China produces circa 230,000 tpa of that. The US consumes around 35,000 tpa, a figure that is rising rapidly each year. In contrast, the US itself manufactured less than a 1,000 tonnes of NdFeB magnets last year. So if China were to feel too aggrieved at the US’ newly imposed blanket tariff on its exports, and decided to retaliate with the aforementioned restrictions of rare earths-based products (above all, NdFeB magnets), the US would go into complete meltdown. The financial support thrown at the likes of HyProMag USA by the US government would be immense. Already we have started to see this in recent years, as covered in my introductory note.

And this brings me nicely to the next significant news item of the past three weeks, relative to the Mkango trade. Last week, two US congressmen introduced a bill – the Rare Earth Magnet Security Act – to further incentivize US-based NdFeB magnet manufacturing. In its introduction, it stated the following:

“The bipartisan bill creates a $20 per kilogram production tax credit for magnets that are manufactured in the United States, or $30 per kilogram for magnets that are both manufactured in the United States and for which all component rare earth material is produced and recycled or reclaimed wholly within the United States.”

“This legislation is vital to ensuring US national security, sustainable supply chains, and a resilient industrial base.”

Were this bill to pass into law, it would provide a substantial boost to the project economics of HyProMag USA’s operations.

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Finally, it’s worth touching on developments in the humanoid robot industry. One of the world’s largest companies, Meta, last month signalled its intent to make a significant push to develop AI-powered humanoid robots – focusing initially on applications like household tasks while aiming to create a broader ecosystem of AI, sensors, and software that could power robots manufactured by various companies.

It is highly worthwhile reading an update note published by Adamas Intelligence last month. It highlights Wall Street projections of explosive market growth, with Goldman Sachs estimating a $38 billion market by 2035 and Morgan Stanley forecasting up to $357 billion by 2040, alongside millions of units deployed globally. Elon Musk’s prediction of 10 billion humanoid robots by 2040 is cited, alongside even bolder long-term estimates.

The report emphasizes that producing 10 billion robots by 2040 would require a massive increase in NdFeB magnet production—186 times the current global annual output—necessitating a 93-fold expansion in capacity.

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All in all, over the past three weeks I have become even more bullish on the long-term investment case for Mkango. Through its unique recycling technology, HyProMag (of which Mkango owns 79.4%) could effectively become the lowest cost manufacturer of NdFeB magnets in the world – an industry that is valued at circa $18 billion per annum currently, and is expected to more than double over the next 10-15 years. And those forecasts do not account for the real possibility of truly parabolic growth in the humanoid robot industry over that period, which could conceivably increase the current $18bn pa market by many multiples.

The global investment community is rapidly becoming more aware of the US’ urgent need to establish a domestic NdFeB magnet manufacturing industry, as well as ex-China sources of rare earth elements (such as Mkango’s Songwe Hill mine) as crucial feedstock for that desired industry.

In the near term, I am expecting an update on the NASDAQ listing of Songwe Hill and Pulawy (for which I think the implied enterprise value will exceed Mkango’s current market capitalization by at least a couple of multiples); as well as on government funding for the HyProMag projects, and on offtake and supply agreements for those projects.

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Disclaimer: The author of this article, Myles McNulty, is a private investor. He currently holds a long position in Mkango Resources.

This article has been written for information purposes only and does not constitute a personal recommendation, offer or invitation to buy or sell any investment referred to within it. Investors should form their own conclusions and/or seek their own advice to determine whether any particular transaction is suitable for them in the light of their investment objectives, the benefits and risks associated with the transaction and all other relevant circumstances.

The views expressed in this article are those of Myles McNulty. They are based on information sourced entirely from the public domain, which is believed to be reliable. However, no warranty or representation, express or implied, is made about the accuracy or completeness of this information, which may be subject to change without notice. Any opinion given reflects Myles McNulty’s judgement as at the date of this article’s publication. Any or all statements about the future may turn out to be incorrect.

Myles McNulty has no business relationship with any company mentioned in this article, and has received no compensation from any party - besides Substack subscribers - for writing it.