By Dr. Michael Green

Truly transformational news this morning as US$7.5 million is being invested into Kazera’s tantalum operation in Namibia to fund the move into lithium production. What’s more this values a division that the market was awarding no value to at $15m. Set against a market cap of less than this. The “market” can be a funny beast sometimes…

This comes on top of good news yesterday but that has all rather been eclipsed with this big investment in the tantalum project to help exploit the untapped lithium potential – a move which very neatly serves to value the lithium assets in excess of US$15 million and allows for 51% of future Li revenues generated. Hats off to Mr Edmonds for pulling this off.

To start off, it is worth pointing out that this is a non-dilutive investment of US$7.5 million in cash, machinery and services, enough to cover the costs of the processing plant upgrades required to increase production from the Tantalite Valley Mine (TVM) and the construction of a lithium processing facility. Tantalum production is expected to substantially increase from Q4 2022 onwards, with lithium production scheduled to commence in Q1 2023.

Kazera’s 100%-owned subsidiary, African Tantalum (Aftan), has entered into a contract with Hebei Xinjian Construction (Xinjian), a Namibia based company. Under this, Xinjian will be investing to acquire 49% of the new SPV to be formed by Aftan, which will have the sole rights to market the lithium produced at TVM by Aftan. It is worth pointing out here that Xinjian will not own any of the mine or the lithium mineralisation/orebody and that Kazera remains in control of the lithium.

The investment will be a mixture of cash, machinery and services, with a minimum of US$2.5 million payable to Kazera in cash, with US$100,000 due on 25th July 2022, US$400,000 by 15th August 2022 and the remaining balance in instalments – all made on or before 31st January 2023.

Currently, the company is extracting lithium as part of its tantalum mining process. To separate out the lithium a further process will need to be added to the company’s current production facility. It is anticipated that this will be completed during Q4 2022, with first lithium sales expected in 1Q 2023. Initially, lithium will come from the reprocessing of tailings – as the mineralisation that has been mined over the years consists of tantalum and lithium (which has never been extracted).

As we learned yesterday, management is now happy with the grade of tantalum being achieved in the concentrate. But to get tantalum production up to a decent level requires a ball mill (which is a pretty expensive piece of kit), to grind run of mine material before it goes into the existing processing plant. The US$5 million for equipment and services side of the investment will give the project access to mining equipment from China.

Importantly, the value and specifications of any machinery or services will be agreed between the parties before they are contributed. So, the company has made sure that it is in a very good position by being able to ensure that every piece of machinery to be brought on site and its price will be pre-agreed, so Kazera don’t end up with a load of old tat. The ball mill that looks as though it will be installed is German and is already in the country and available to be installed rapidly.

TVM has never had any proper money thrown at it. Over the years, it has just been a case of firefighting – fixing things that were broken with no money to make any improvements. So, it does seem that finally the new team will be able to create the sorting of processing facility for tantalum and lithium that in the past they could only dare to dream about. The US$2.5 million in cash will provide the funds to run the expanded TVM operation until it is properly commercially up and running. In one fell swoop, the tantalum operation will no longer be a drain on the company’s resources.

Kazera’s CEO Dennis Edmonds was quick to point out that “This deal is completely transformational for Kazera. Not only does it give us the cash to fund operations in Namibia well beyond when we expect to become cash generative, it also brings us the machinery and equipment to completely overhaul the operation. It will enable us to substantially increase Tantalum production in the near future, and by Q1 2023 we will also be benefitting from the production of lithium.”

Yesterday we learnt of big improvements at the tantalum project and the plant is now producing a product with an acceptable grade. This means that Kazera is now in a position to export its first commercial delivery of tantalum to its Chinese partner. Volumes haven’t been as high as hoped but the company has plans to upgrade the plant to improve productivity and increase reliability, which should serve to significantly improve tantalum production over the next two months.

The first tantalum delivery looks like it will be 1,000kg of concentrate in size and shipped by air, containing 250kg of tantalum. At US$60 per pound this would be worth US$33,000. Looking ahead, regular monthly shipments of the 4,000kg of concentrate are now planned which would have a sales value of US$130,000 on a monthly basis, with suggested production costs of around US$60,000.

We have seen that rapid progress is being made right across each and every one of Kazera’s operations – and now there is the added excitement of the Rare Earth Elements (REE) play to come as well. Going forward, it looks as though the news flow won’t disappoint. The awarding of the HMS Mining Licence could happen in the next month or so as the original granting of the licence to the company is expected to be supported on appeal. There ought to be plenty of news on increasing production of tantalum and lithium production too. Plus, there is rapidly rising diamond production now that the impressive 16-foot-wide Pan Plant is in place. In addition, we expect to see progress on the Buru Hills REE play which will be funded with revenue from tantalum, lithium and diamonds.

The new REE interests could see a JORC-complaint resource for Buru Hills announced by the year end which we believe could generate a big re-rating of the shares. At the same time all this potential is now in the hands of a new look management team which has just the sort of skill set a mining company of this size could dream of, along with tremendous experience of getting things done in Africa. It is not hard to get excited about the potential here.

We initiated coverage on Kazera with a Conviction Buy stance in August 2020 at 0.70p with a target price of 2.50p and very much look forward to revisiting this valuation/target price to reflect the dramatically changing fortunes of the company over the past year or so. Plus, now the sparkle of the US$15 million plus lithium project has been added. A US$7.5 million investment at the asset level going into a £8 million market cap (US$9.6 million) company indicates to us the latent disjoint between the market’s valuation award and the underlying value of the assets.

In seeking to place a valuation and a target price on the stock, we have used a SOTP estimate. Diamonds have been valued at 5% of in situ NPV of US$60 million which is US$3 million. On the HMS we have valued Walviskop and Perdevleui separately. A financial model was developed for Walviskop and NPV attributable to Kazera was calculated to be US$17.38 million. On Perdevleui we made some bold assumptions here and multiplied the NPV attributable to Kazera for Walviskop (US$17.38 million) by 34 which gives US$590.92 million. With so many unknowns at this stage concerning grade, geology and timing of production we have chosen to heavily risk this figure by an arbitrary 97.5% which gives US$14.76 million. Added together the valuation for Walviskop and Perdevleui came out at US$32.14 million which was then further risked by 50% which reflects waiting for the licence to be granted giving a figure of US$16.07 million.

On the REE project we took the base case valuation from our recent valuation document of £9 million at the Scoping Study Stage (PEA) based on the Terra Search Top 50m non-JORC compliant 14.7Mt at 2.01% TREO for 295KT TREO. The company will end up having a 51% holding which would suggest a £6.39 million valuation or US$7.66 million.  We have valued the tantalum and lithium interests at the Tantalum Valley Mine (TVM) by taking the forecast combined net revenue to Kazera in 2023 of US$3 million and multiplying it by an undemanding 6x multiple to give US$18 million. £800k (US$0.96 million) cash estimate was assumed with the full US$7.5 million cash and machinery spent on taking the TVM project through to profitability.  All these number went into our SOTP table, and the total value came out at US$45.69 million or £38.07 million which worked out at 4.0p per share based on the current number of shares in issue (937.164,910). Buy.

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