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Date : 08/04/2021

Xanadu Mines

ASX :

XAM

Market Cap : $75.33 Million

Buy

52 Week Range : $0.025 - $0.085

Share Price : $0.071

Early stage firm with copper and gold deposits that have the potenital of a Tier-1 Project in Mongolia. We issue a "Speculative-Buy" recommendation.

Company Analysis

Xanadu Mines Limited (ASX: XAM) engages in the exploration and development of various mineral projects in Mongolia. The company primarily explores for copper and gold deposits. Its flagship project is the Kharmagtai copper-gold project located in Omnogovi province to the southeast of Ulaanbaatar. In addition to the Kharmagtai project, Xanadu also has 2 projects in its portfolio – Red Mountain and Yellow Mountain, located in Dornogovi Province of southern Mongolia, and the Bulgan Province of Northern Mongolia, respectively.

The Mongolian projects have several advantages for Xanadu:

  • It is located right next to the world’s largest consumer of commodities, China.
  • Infrastructure is readily available as Rio’s Oyu Tolgoi is close by, with established grid power, roads, rail, and water that will enable short time to production and low capital development intensity.
  • Mining accounts for 21% of Mongolia’s GDP and 85% of exports.

Kharmagtai Copper-Gold Project

Kharmagtai is located within the South Gobi porphyry copper province that is home to a number of porphyry deposits in the South Gobi, Mongolia. The project has good infrastructure close to it with roads, powerlines, and planned rail lines to the Chinese border town Ganqimaodao for easy export. Xanadu has a 76.5% interest in the Kharmagtai Project.

A 30-year mining licence has been obtained and a registered water resource is also made available for the Kharmagtai Project. The Project achieved a 400% increase in contained copper and a 250% increase in contained gold over 4 years. The resource growth potential is well understood and significant additions targeted through the 2020-2021 drill program. Low discovery costs of less than 0.05 cents per pound of copper. This is significantly less than the global average of over 0.07 cents per pound of copper. The mineral resource at this stage is:

  • 1.9 Mt of copper
  • 4.3 Moz gold

Red Mountain

The Red Mountain copper-gold project is located in the Dornogovi Province of southern Mongolia, approximately 70km west of the future industrial centre of Sainshand. Red Mountain is a highly prospective porphyry copper-gold project. The project comprises a large and underexplored porphyry district and consists of multiple co-genetic porphyry copper-gold centres, mineralised tourmaline breccia pipes and copper-gold/base metal magnetite skarns, which occur within the central part of Mining Licence. Xanadu has a 90% interest in the Red Mountain Project.

Exploration at Red Mountain has defined broad zones of strong quartz stockwork veining and associated high-grade gold mineralisation (typically around 0.5 to >5 g/t gold and 0.3 to 1.5% copper). The joint venture between Jogmec will be working on the exploration of this project. Jogmec will be investing for the exploration expenditure that is estimated to cost US$7.2 million and this will take their interest up to 51% in the project. Xanadu, however, will manage the project.

The potential Red Mountain brings is similar to Kharmagtai, and the target is a Tier-1 higher grade, lower tonnage deposit. Drilling has commenced in February and the current program consists of 4300 meters of diamond drilling

Yellow Mountain

The Yellow Mountain porphyry copper project is located within the Bulgan Province of Northern Mongolia, approximately 230km northwest of Ulaanbaatar. The project consists of a cluster of porphyry related lithocaps occurring within a 15km northwest oriented corridor of porphyry-related alteration and mineralization. This is at the north-western extremity of the Selenge Porphyry belt which hosts the Erdenet copper-molybdenum deposit.

The Yellow Mountain is characterised by the erosional remnants of an advanced argillic lithocap. Several prominent siliceous ledges occur within massive chalcedonic silicification, residual silica, quartz-alunite-diaspore and quartz-pyrophyllite. The lithocap is underlain by sodic illite-pyrite, and laterally enclosed by green andesitic volcanic rock (chlorite-epidote). All alteration types are stained by jarosite and clearly have appreciable pyrite contents at shallow depths. Alteration and field relationships suggest a high level of formation above a deeper porphyry intrusion.

This again is an early-stage exploration project, and it is located in an established copper district.

Company Updates

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Source: Tradingview.com

The catalysts for the stock price momentum in recent months are:

Expansion of Kharmagtai Project – The Kharmagtai exploration strategy is constructed in two components, with Phase 1 designed to understand the scale of the mineralised system through extensional drilling with several large step-outs from known zones, following broad geological and geochemical trends. Phase 2 will use the outcomes from Phase 1 to design and execute a more surgical drill program to better define higher-grade zones.

Phase 1 drilling program has completed 17,000metres out of a 23,000-metre plan, resulting in significant expansion to the mineralised system at Kharmagtai, with approximately 9,800 metres of assays still pending.
It Includes drilling at the Zaraa Prospect which intersected extensive zones of anomalous copper and gold mineralisation, more than doubling the size of the immediate target zone. The announcement also included drilling at Stockwork Hill which has identified a potential structural repeat of mineralisation below the currently defined Mineral Resource.

Discovery drilling nearby at the Pechko target area has also identified a large scale, potentially mineralised tourmaline breccia system.

Stockwork Hill – Four diamond drill holes have been drilled at Stockwork Hill totalling 4,100m. Three drill holes have targeted a long strike of the higher grade bornite zone. These holes have encountered several low angle structures that have offset mineralisation and have identified the potential offset to the northern Stockwork Zone at depth. This suggests the higher-grade zone has been shifted to beneath White Hill. Geological models are being updated to incorporate these results

Zaraa Prospect – This tests the dimensions and extensions to the large, mineralised envelope as well as any internal high-grade zones. This mineralised zone is not currently included in the Kharmagtai Mineral Resource Estimate and has the potential to add significant value to the project. The current drill program has made significant progress in these objectives, with five holes completed. Zaraa mineralisation has been expanded 200m to the south, 200m to the north and 150m to the west. New modelling of these results show that Zaraa is now 700m long, 300m wide and 650m deep and remains open along strike and at depth

High Grade Zone Extension at Kharmagtai – The purpose of drilling was to test extensions of Stockwork Hill at depth to inform the second phase of drilling focused on higher grade targets. The area was drilled from the northern edge of Stockwork Hill southwards across the deposit and was designed to expand the northern edge of the tourmaline breccia mineralisation and then expand the high-grade bornite zone towards the south.

Highest density of bornite mineralisation encountered at Kharmagtai to date. This hole provides a snapshot of what the lower zones of mineralisation at Kharmagtai could look like with increasing gold to copper ratios. The tenor of gold within the bornite is impressive, containing two to four grams of gold for every percent copper. This hole materially expands the width of the high-grade bornite zone and will help guide drilling for additional high-grade extensions.

Two Diamond Drill Rigs at Kharmagtai – The commencement of two drilling rigs is targeting high-grade bornite mineralisation at the Stockwork Hill deposit, following Xanadu’s most recent drilling which encountered the richest mineralisation to date. The drilling should extend and test the structure, depth, and scale of the high-grade bornite mineralisation we mentioned in the just the previous point. Results of these holes will further inform Phase 2 of the Kharmagtai exploration program, targeting high-grade extensions and new discovery.

Another Extension at Kharmagtai – The drill hole intersects a broad zone of high-grade gold-rich chalcopyrite and bornite mineralisation south of the Stockwork Hill resource, expanding the high grade bornite zone beyond the defined resources. The drill hole intersects 181.4m @ 0.68% Cu and 1.78g/t Au (1.59% eCu) from 648.6mIncluding 92m @ 1.06% Cu and 3.23g/t Au (2.71% eCu) from 686m.

Industry Analysis

Copper has been a very hot commodity for a few months. Currently, copper prices are at 7-year highs after rebounding very quickly from the crash in March 2020.

Copper prices are very sensitive to the global economy. The metal is extremely important to the manufacturing and infrastructure industries that usually determine economic activity. News of a vaccine and return to normal are all fuels to the demand for the commodity during 2021. Another very important consideration to be made here is that a shift to renewable sources of energy will increase the demand for copper in the future.

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The outlook for copper is robust. The medium-term demand is expected to increase as government spending programs will keep boosting industrial metals. Copper prices are forecasted to hit all-time highs by the end of 2022 as economies completely recover from the pandemic.

In the long-term, the demand for copper is going through the roof. Copper is a very essential commodity and is at the centre as we shift away from traditional energy sources and into renewable sources of energy. Annual global production of 40 million tonnes of copper will be required to meet the demand for the metal. This will fundamentally lead to an increase in prices in order to maintain equilibrium.

Investment Thesis

Xanadu is a very early-stage company with its flagship project still pending a pre-feasibility study and its other 2 projects in the exploration stage. Therefore, Xanadu does not generate revenues yet. At the last quarterly update, Xanadu is fully funded to continue exploration with a Closing Cash Balance of $7.7 million.

  • Net cash from operating activities stood at $562,000 for the quarter and $2.63 million for the 12-month period.
  • Xanadu has invested $2.19 million in exploration activities during the December quarter and $5.9 million during 2020.

With $7.7 million in cash, Xanadu is in a healthy position to take it through to its next milestones. The near-term catalysts for Xanadu are:

  • Kharmagtai Stockwork Hill Follow-Up Drill Results (April 2021)- KHDDH564
  • Phase 2 Drilling Program Structure (Q2 2021)
  • Kharmagtai and Red Mountain exploration drilling results (Q2 2021)
  • Mineral Resource Estimate Update (Q4 2021)

Timeline

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Source: Xanadu

Xanadu had $4 million in debt back in FY2016. However, since then the firm has ensured that they are equity funded in order to reduce risk and enable the management to focus on the exploration projects. This puts the capital structure of Xanadu at 100% equity capitalisation. The total assets of the firm are made up of its property, plant and equipment, and cash. Together they come in at $52 million. They do not have any liabilities given their early-stage operations and equity funding.

Recommendation

Xanadu is an early-stage company that is still a few years away from completing pre-feasibility study on its flagship Kharmagtai project. Copper and Gold will remain key commodities given their respective importance to markets and economies. The projects have consistently yielded expansion and extension capabilities from early drilling results. The pending results from current activities bring about plenty of near-term catalysts from the share price. We recommend a “Speculative-Buy” on Xanadu.

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