DNI Metals and Cancana Resources – Sharing a Revenue Goal in Brazil
#6 and #25 aren’t that different, at least from a mining perspective.
From the periodic table, six is carbon (here, think graphite), twenty-five is manganese. Both of them have to be extracted in bulk – no vein chasing like with gold. Both are recognizable in the ground to even a partially trained eye – again, very different from gold. Both are measured in tonnes – none of that ounce or gram minutae. Both have a wide array of uses (including batteries) and neither has a satisfactory substitute in its major applications.
Both have substantial production out of Brazil.
Brazil is a beautiful marvelous country with a unique multicultural heritage, an exquisite style of futball and beaches that have had international hit songs written about them (Copacabana and Ipanema). It is the fifth largest country in the world by area and includes the biologically vital Amazon Rainforest.
Of interest to global trading, Brazil has roughly the 7th largest economy in the world, backed by a diverse population of roughly 200 million. GDP in 2013 was USD$2246 Billion, and a large part of that economy is the mining industry (quicklink).
Brazil … has rich reserves of important metals such as bauxite (Aluminum), iron ore, niobium and nickel. Brazil is also a leading producer of precious metals such as gold. Mineral products and mining account for 2% of Brazil’s GDP. The iron ore is the most important in Brazilian exports, enabling the country to earn revenue of approximately $2.3 billion. Brazil is also the largest exporter of tin, lithium, niobium, bauxite and manganese, which contribute to overall revenues of mineral exports.
The 2012 world production of natural graphite was 1,100,000 tonnes (United States Geological Survey). Brazil was the third largest exporter at 75,000 tonnes, behind China and India.
In manganese, Brazil annually ranks as the fourth or fifth largest producer, with China, South Africa and Australia leading the way. According to Roskill Information Services, global consumption slightly outstripped supply in 2014.
I’ve recently seen two companies that are seeking short term cash flow in Brazil, in the same way, chasing two different numbers. Cancana Resources Corp. is mining #25, while DNI Metals Inc. is after #6.
Cancana (TSXV:CNY) has the makings of a great story. Its BMC project in western Brazil (five claims totalling 37,000 hectares = 142 sq miles =370 sq km) towards the Bolivia border, has the highest manganese grade in Brazil. Fertilizer manufacturers require Mn of at least 48% purity – Cancana averages 54%! For this high grade Cancana can charge a premium over other suppliers.
The technical report filed at SEDAR (click here) describes the usual elements like geology, Brazilian mining laws, historic exploration and work carried out by Cancana. Most technical reports read like, well, technical reports, but this one is refreshingly easy to read. The charts and maps are informative – the pictures of manganese boulders are spectacular!
This area has been ongoing production since 2005. After a false start under the former management team (which is why it’s the former management team), Cancana has acquired a large manganese rich land package, with some of the veins running 2 to 3 metres in width. They also have high priority exploration targets across Espigao D’Oeste.
Cancana’s business model is to start with the known knowns. Develop the known manganese fields, consolidate title to the local boulder fields, and bring processing into one central plant. This should result in short term revenue, high plant usage, low downtime, and higher margins. Combining this with organic growth through the drill bit (scheduled to commence in May, 2015), Cancana has the opportunity to supply the global steel market while maintaining its premium charges.
To hit its business plan targets Cancana will have to do a capital raise around June, 2015. Sentient Group invested USD$5M into Cancana’s treasury and installed the new team, which makes Sentient the indirect controlling shareholder, but Cancana as a stand-alone entity will have to raise its own capital and cannot count on Sentient bailing it out.
Cancana’s year end is Dec 31, which means the 2014 annual and Q1/15 disclosure are imminent. The Q1 MD&A will be a must-read to see how close the company is to being in revenue.
So, new people, new money, work from existing ore bodies, add to the existing infrastructure, get quickly into revenue. That’s the same plan that DNI Metals is using for #6.
Until the fall of 2014, DNI’s focus had been on three polymetallic Alberta projects totalling over 1200 sq km,. The board recognized that the market these days is giving little value for those kinds of projects. Save them for another day. Decisions were made to address certain assets (DNI now has a royalty on the Kiewit Gold Mine in Utah, that should pay out at least $25,000 a year while the mine is in operation) and to move into the Brazilian graphite market, in a way similar to what Cancana is doing.
DNI entered this industry not as a typical mining producer, but as a supply chain participant. In March, 2015 DNI entered into an option agreement to earn a 100% interest (less a royalty) in a Brazilian graphite property. Due diligence is underway. It also announced an agreement with Great Lakes Graphite (TSXV:GLK), whereby GLK can buy up to 34,000 tonnes of natural flake graphite concentrate from DNI, which GLK intends to process at its Matheson Facility into micronized flake graphite. Pricing is fixed for the first two years.
That puts DNI as a middle-man between resource and processing.
To mitigate the Brazilian geographic and political risks, DNI also expanded into Madagascar, an island very similar geologically to Sri Lanka and southern India. (One theory is the continents drifted apart on a lubricating layer of graphite, click here).
Madagascar, like Brazil, is biodiverse and rich in resources. In addition to producing over half of the world’s sapphires, Madagascar is known for large flake and high quality graphite, mostly from the central-eastern part near Toamasina.
In early March, 2015, DNI announced it had signed a Letter of Intent to purchase a graphite property in that area, subject to due diligence. Just as Cancana is stepping into a known manganese boulder field, DNI’s target property sits between two currently producing graphite assets, in a well-defined graphitic belt that has been producing for over 50 years.
DNI can develop the known graphitic deposits, consolidate title to the local properties, and leverage existing infrastructure (including Sherritt’s 220 km Ambatovy pipeline). This should result in short term revenue, high plant usage, low downtime, and higher margins. Combining this with organic growth through the drill bit, DNI has the opportunity to supply the global graphite market.
Does that paragraph sound familiar? It’s almost identical to what was written about Cancana above.
As with Cancana, there is a new team, with extensive experience in finance, mining generally, and graphite particularly. There is good balance between the academics and those with practical experience, with on-the-ground team members in Canada, Brazil and Madagascar. The company has short term revenue clearly on its mind. (Disclosure: I’ve been on projects with various members of this team at different times in the past.)
The next key development for DNI is to raise sufficient capital to close on the Brazilian and Madagascar assets. A $2M financing has been announced. Expect a steady stream of news on the Madagascar and Brazilian due diligence, which should support that financing.
#6 and #25 – who will cross the finish line first?
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>