Alberta; oil waste water
After a few months of frantic marketing, market making, numerous news releases, media coverage and road shows/conferences, my first Hirschberg Premium Stockpick MGX Minerals finally delivered really material news when recently closing a private placement for proceedings of C$3.2M, so I felt it was time to do an update on the company. After the ongoing avalanche of news releases to the tune of about five per month on average, handling all sorts of semi-material things like acquiring oil brine claim packages on different ocassions, having water treatment partner Purlucid working on a pilot plant, extracting lithium from waste water, upgrading lithium content, signing deals about demonstration of water handling, receiving confirmation of their lithium extraction method etcetcetc, all this without NI43-101 compliant motivation on economics or reserves&resources, finally a tangible piece of news arrived which I could discuss/analyze. And this financing is remarkable in itself as well, as I will explain later on.
After discussing things with CEO Jared Lazerson, it dawned on me that buried in this flurry of news releases something important could be going on. By merely treating the waste water with the Purlucid method, so not even extracting lithium of any other byproduct, they could theoretically provide an incredibly profitable service to oil&gas (O&G) producers. My reservations about economic lithium/mineral production, as discussed later on, would render pointless, as this would be just an extra. At the moment, producers pay anything ranging from $8 to $13/per barrel of waste water to have it transported and treated elsewhere, whereas Lazerson estimated there is a good chance for MGX to produce below $1/pb, as test runs performed by Purlucid at producers already indicated this. Again, the proof is definitely in the pudding here, but in this case the signing of contracts with producers will provide a huge cornerstone, on which MGX can base its funding for the construction of its small treatment units. MGX already claims it has signed a demonstration and test contract with a "major oil and gas operator", but didn't mention the name of this operator. Having the name of such an operator out would provide a lot of instant credibility, but Lazerson told me they are under a confidentiality agreement.
Nevertheless, if MGX manages to sign substantial contracts, and can raise sufficient cash to build treatment units, things are getting much more serious of course. Right now this is all in its infancy, with Bruner and especially Marks using their vast networks to gain interest for their paradigm shift.
Going back to Bruner: a news release that wasn't really material in itself in my view but had a huge albeith short term impact on the share price of MGX Minerals was the appointment of Marc Bruner as Chairman and head of US acquisitions of subsidiary Petrolithium Corp. Bruner has made a name for himself in the unconventional oil and gas business in the past, and founded or grew companies like Ultra, Falcon and Pennaco quickly into market caps of billions of dollars.
However, when looking into some of these deals it appeared to me that this was either a long time ago (2000), or there wasn't really a long lasting value (Falcon, which was founded in 2005, peaked violently in 2006 to $3.7B but crashed shortly afterwards, losing almost 95% of its value 1.5 years later, Bruner left Falcon in 2011, and Falcon still doesn't have cash flow btw). This has been the last big feat of Bruner since then, he was also involved in other small unconventional plays like Paltar Petroleum in Australia after this, without much success. His appointment on January 30, 2017 and the marketing around it created a lot of excitement among investors as can be seen in the chart:
Share price; 1 year period
Unfortunately there wasn't much fundamental value to this news so the following sell-off was brutal as well, sending the stock from the C$2.50 spike to a more fitting trading range of C$1.20-1.40 for a while. The share price dropped out of this range in April after investors got tired of waiting for fundamental news on for example the Driftwood Creek PEA and the uplisting to the Venture (both slated for Q1 2017), and a capital raise as the company was burning through its cash at high speed, and..... as this little paragraph was added to most news releases since April 10, 2017:
"MGX is advancing its petrolithium projects into production without first establishing mineral resources supported by an independent technical report or completing a feasibility study. A production decision without the benefit of a technical report independently establishing mineral resources or reserves and any feasibility study demonstrating economic and technical viability creates increased uncertainty and heightens economic and technical risks of failure. Historically, such projects have a much higher risk of economic or technical failure."
Later finetuned into this:
"MGX may decide to advance its petrolithium projects into production without first establishing mineral resources supported by an independent technical report or completing a feasibility study. A production decision without the benefit of a technical report independently establishing mineral resources or reserves and any feasibility study demonstrating economic and technical viability creates increased uncertainty and heightens economic and technical risks of failure. Historically, such projects have a much higher risk of economic or technical failure."
Usually resource estimates and economic studies are required before any kind of investing decision. Fortunately for MGX Minerals, they are focusing more and more now on waste water treatment, which is a technical service, and doesn't even involve mineral extraction in order to be possibly very profitable. This, if it all works out of course, is a big relief on my side, as I see a mining company pursuing a mineral extraction project without any report or study as doomed. Imagine a mining company or a oil and gas (O&G) company for that matter going into production without any report on reserves/resources or economic study.
The last company trying to pull this off that I know of was Colossus Minerals, and this didn't end very well as you might recall. Due to stellar drill results and Brazilian investors (which simply blindly loved gold during the last bull market), CEO Ari Sussman was able to raise enough capex to build the mine at Serra Pelada, but since underground water issues weren't investigated in a study or tested (also no resources let alone reserves estimated) it all hit them by "surprise" and Colossus went bankrupt as they couldn't handle the excessive groundwater. The eventual resource estimate showed far less ounces of gold than believed by Colossus management as well btw, but by then it was already too late. As an aside: a film studio could make a nice blockbuster movie out of it in my opinion.
In my view, it would have been very hard for MGX Minerals to try and build mineral extraction operations without any report, as it will be almost impossible to raise cash in order to fund any capex. Any bank will require very solid economic studies, off take agreements for lithium and byproducts. Any fund or serious investor will require at least solid studies. And for solid studies you need a resource, and for a resource you need proof of economic extraction.
So far, I have seen a lot of news releases, even to the point of third party independent "verification" of the process actually producing lithium, but nowhere was mentioned if this process was economic or not. As MGX Minerals is dealing with a new, proprietary method, risks rise exponentially, and the big question is as always: will it economic on a commercial scale or not.
The method clearly hasn't been a slam dunk, as it already provides enough issues on bench scale. Main obstacle in my view is the formation of a gel like substance after all evaporation stages, still containing 28% water, which is impossible to treat further.
Other things are remaining impurities like calcium although last test results indicate significant improvements in this regard. The proprietary method seems capable of concentrating lithium and removing most of the impurities now, but it has to be said that the feed lithium grade of just 67Mg/L is very low, and requires colossal amounts of brine to be processed. On the other hand, as a consequence the amount of by-products will be colossal too as the average feed grade of calcium (Li grade times 343), magnesium (x 42), potassium (x 67) and sodium (x 851) is very high. As I discussed in my earlier article on the company, these quantities are so large that they could cause pricing shifts on the markets, so I'm not sure if these by-products should be included.
Luckily, MGX doesn't have to bother with economic extraction of minerals to this degree anymore, as the waste water treatment (getting rid of oil, silica etc) is much more important and in my view the real driver in all this. With this concept, any mineral that could be extracted is a bonus, so the company doesn't even have to evaporate all water anymore in order to get to economic quantities. And wouldn't run into gelling issues or likewise technical recovery problems.
Back to the financing, which was finally closed on May 12, 2017. The company managed to raise C$3.2M which is no small feat for a CSE stock, but it wasn't the most ideal financing either, far from it I might add. As the company needed the money quickly and obviously badly, a number of concessions had to be made:
1. it was a short form prospectus, meaning the shares are immediately free trading after closing, putting pressure on the share price for buyers just wanting the warrants
2. the issuing price was lowered from C$1.20 to C$0.90
3. the planned closing date was extended two times, originally planned at around March 27, 2017
4. the warrant exercise price is C$1.15 which is very close to the share price at the moment of closing (C$1.04)
5. the intended amount C$5M wasn't achievable and had to be lowered to the closed amount of C$3.2M, which is quite something in a time of mostly oversubscribed financings
6. the financing was done with full warrants whereas most financings are done with half warrants these days, increasing selling effects
7. a considerable finders fee of 8.5% cash and 8.5% compensation options (right to buy shares for C$0.90 plus a warrant) was handed to agent Mackie Research Capital, which was first lowered from 8% cash and 8% compensation options at the initial offering to 6.5% cash and 6.5% compensation options in between, and raised later to the final fee level of 8.5% as mentioned
8. strategic investors like Hirschberg had to buy close to 30% to support it
It will be clear this wasn't a gem of a financing, but the cash is raised and the company can proceed. Proceedings will be used as followed:
"The Company intends to use the net proceeds from the Offering to reduce indebtedness (including trade payables and up to CAD$500,000 in repayment of a loan made to MGX by an officer of MGX) and for development and exploration of its Alberta Lithium Claims, Sturgeon Lake Property and Driftwood Property (each as described in the Company’s Annual Information Form, dated March 31, 2017) and for general working capital purposes."
Actually this repayment of a loan by a director should be the ninth negative of this financing, as the company can't use this cash now. The officer shouldn't be demanding his loan back at this early, cash burning development stage, but instead give the company more time to repay or converting his loan into shares in my view.
After talking to Lazerson, it appeared that this financing isn't the last development in this regard in the short term, and news will follow soon.
Besides discussing the petrolithium/waste water operation, I also brought a few other things to the table. As the Driftwood Creek PEA has been expected by investors to be released in Q1 2017, I was wondering about the status of this study. Lazerson explained that the engineers doing the report want to include test runs by a small 70tpd test mill, which was acquired and refurbished on site. The mill is built up now and in the stage of configuration and optimization, and it will take approximately 45-60 days until the testing is finalized, and shortly after this the PEA results are expected.
Another important subject for me is the uplisting to the Venture exchange. According to Lazerson, they are awaiting the upcoming financing news which will be within 1-2 weeks, and shortly after this the talks with the TSX will continue again. These talks have been delayed for a few months, as there were issues raising capital, which is needed according to uplisting criteria. It will take probably another 60 to 90 days to actual uplisting.
As the entire petrolithium story has been an extremely difficult wild card in my view from the get go, not only to develop the proprietary method but also and especially to prove this on a commercial scale, I am happy to hear that MGX has another/different wild card now with their potentially very profitable waste water treatment thesis, but I still see the fundamentals of the world class Driftwood Creek magnesium project as the premier value driver, and everything else as a bonus. Nevertheless it is pretty entertaining to have this wild card circus swirling around a conservative magnesium project, and I am really looking forward to various catalysts, for example the PEA, the uplisting and the first substantial contracts with big names in the O&G business.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter, in order to get an email notice of my new articles soon after they are published.
The author is not a registered investment advisor, currently has no position in this stock, and MGX Minerals is a sponsoring company. All facts are to be checked by the reader. For more information go to www.mgxminerals.com and read the company’s profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.
Driftwood Creek; 2016 bulk sampling