Mustang Resources (ASX: MUS, Share Price: $0.09, Market Cap: $48m) is an investment proposition quite like no other, offering exposure to the company’s emerging Montepuez ruby production project in northern Mozambique. Mustang is currently undertaking a fast-tracked strategy to commercialise the project, which lies adjacent to the world’s largest ruby deposit – operated by Gemfields Plc.
Mustang has advised having achieved its target of processing 525 tonnes of bulk samples a day – triple the rate recorded before prior to plant relocation late last year – with rates as high as 1,000tpd. This will accelerate the company’s ability to determine Montepuez ruby grades, quality and commercial viability.
Market Significance
Mustang’s share price has demonstrated significant volatility since our initial coverage around $0.059 during February, as the accompanying chart clearly demonstrates. Crucially, the company has been able to recapture lost market momentum by providing reassurance and clarity to investors with respect to its ruby sales strategy. Over recent times Mustang has boosted its ruby inventory to more than 176k carats, continued with its Montepuez processing plant ramp-up to a full target rate of ~1,500tpd, and put itself well on track to reach its target of 200,000cts in time for its planned auction in October 2017.
Catalyst – Major Achievements Ahead of First Auction
Mustang has achieved several major operational achievements as it looks to commercialise its Montepuez ruby project, ahead of its first ruby auctions in October 2017.
- Firstly, it has continued to expand its ruby inventory, which presently stands at 176,522 carats.
- Secondly, it has overcome recent water shortages and facilitated a ramp-up in its upgraded processing plant to reach its full target rate of ~1,500tpd.
- Thirdly, recoveries of high-quality rubies have totalled between 500cts and 760cts/day.
- Finally, it is on track to reach its target of 200,000cts in time for its planned October auction.
Figure 1: Bulk sampling of ruby bearing gravels through the processing plant at the Montepuez Ruby Project
Technical Significance
All of the above activity in terms of production enhancements and scheduling is crucial in terms of ensuring that its maiden ruby auction proceeds as successfully as possible – as it will go a long way to establishing ruby quality and product confidence, as well as providing investor reassurance.
Mustang’s inaugural rough ruby auction/tender has been scheduled for 27 – 30 October 2017 in Port Louis, Mauritius. The company has preferred Mauritius over other potential auction locations due to the proximity of the Montepuez project, as well as key Asian customers.
Pleasingly, management is encouraged by the overall quality of the rubies recovered to date and the prices paid at the auctions held by Mustang’s neighbour Gemfields. The auction will define the value range for rubies within each of its grading categories and will be a key indicator of the long-term commercial viability of the Montepuez project. The aim is to generate significant sales revenue that will assist in funding the project’s future working capital requirements and potential expansion plans.
Figure 2: Mustang Ruby Inventory, Aug 2017
Importantly, Mustang has so far received strong expressions of interest in the upcoming auction of its stones from ruby buyers. Significantly, the latest June 2017 Gemfields ruby auction netted a record US$54.5 million for 895,848cts of commercial, medium and high-quality rubies – at an average of US$61.13/ct.
Summary
We initiated coverage of Mustang Resources during February 2017 at a price around $0.059 – representing a current gain of 52%.
Gemstone-producing companies aren’t for everyone. Markets aren’t as large as for more traditional commodities such as base and precious metals – and can be a lot more volatile. Mustang also does not yet have a JORC 2012-compliant Resource estimate.
Having said that, the value of the global ruby market is estimated at US$2 billion annually – approximately the size of the diamond market back in the 1950s. So even if Mustang can partly replicate Gemfields’ success, there is potential for a substantial company re-rating.
