Dakota Minerals Limited (ASX:DKO)

This summary of views is based on the PortfolioDirect rating criteria described in the detailed PortfolioDirect rating report for Dakota Minerals Limited dated 28 February 2017.  No investment decisions should be taken based on the views presented below.  Financial advisers and professional money managers may request a copy of the full Dakota Minerals rating report from here.

 

Recent Events

• Dakota Minerals released details of a maiden lithium mineral resource at the Sepeda prospect in Portugal (ASX 20 February 2017).  

• The company completed the sale of its Lynas Find lithium prospect in Western Australia in exchange for an initial cash payment of A$5.0 million and subsequent payments in cash or buyer’s shares for a total consideration of up to A$8.0 million (ASX 1 December 2016).  

• The company announced that it had acquired a package of prospective lithium properties in northern Portugal (ASX 1 June 2016).  

• A share placement raised $12.3M to be directed to lithium evaluation activities (ASX 10 May 2016).      

Development Stage

PortfolioDirect has classified Dakota Minerals as a late stage Phase I company having demonstrated the existence of a resource with commercial potential.    

Evaluation Summary

Asset Quality

The ‘GLOSS’ rating criteria provide the framework against which the quality of company activities are assessed. 

The quality assessment for Dakota Minerals points to a rating in the mid-range of feasible outcomes.   

• Intercepted grades in the first two phases of drilling vary between 0.5% and 1.3% and, at an average of 1.0%, are toward the lower end of the range of those in known hard rock deposits globally.    

• Sepeda is in an area of known mineralisation which had been subject to non-lithium mining over a lengthy history.  There are no nearby lithium mines or processing plants. 

Portugal does offer a favourable regulatory framework with a history of high quality mining projects having been supported.  From the viewpoint of having access to markets, Sepeda is well positioned insofar as it is within the bounds of the European Union although other companies, attracted by the size of the European electric car market, are also aiming to take advantage of similarly neglected deposits in the EU.

• The region in which Sepeda is located contains swarms of lithium bearing pegmatites, one  within the primary area of interest being some 3km long and up to one kilometre wide.  While outcropping is evident, some pegmatites are visible only from underground workings.  Technical assessments have inferred a folded system of mineralised dykes. The pegmatite sampled for purposes of the Sepeda resource estimate dips between 60 and 90 degrees.  The resource comprises five pegmatite units. The structure hosting the majority of the mineralisation extends to a depth in excess of 300 metres.

• Incomplete results from metallurgical test work informed the Sepeda resource estimate.  While the consultant undertaking the resource estimate reported that preliminary results have been consistent with what had been expected, the suitability of the Sepeda product remains uncertain, at this stage, which is reflected in the PortfolioDirect rating for this attribute.  Completed test results are expected by the end of May 2017 when an adjustment to the rating may be warranted.

• The company has referred to the resource estimate as permitting a 10 year mine life although the Sepeda resource is only categorised as inferred.  While the company has drawn attention to multiple possible deposit locations suggesting a far longer duration of activity in the region, the rating reflects the currently understood features of the Sepeda deposit.    

Investment Risk Assessment

The risk assessment places Dakota Minerals in the middle of the range of feasible outcomes for a company at its stage of development.   

• Funding risks are at the low end for a company at the stage of development of Dakota Minerals.  It is sufficiently well funded for the current program of resource assessment and evaluation studies although, as the scope and complexity of technical and financial studies evolve and engagement with potential customers becomes more advanced, expenditure needs will rise quickly.  One advantage of the current positioning is that the company can avoid having to dilute the interests of current shareholders in order to progress the project to the point of a development commitment.

• Market expectations have been falling.  The company's share price has dropped 78% since mid 2016 and its investment return since the beginning of 2015 is near the bottom quartile of returns available to investors in the sector. The strongly positive investor reaction which had come with discovery of the  Lynas Find property has given way to greatly reduced expectations of what the company can achieve.

• The risk of regulatory delay should be low in Portugal which has a history of support for the mining industry but, as the experience of Highlands Resources in neighbouring Spain has shown, for example, unsettled political conditions in Europe are having unanticipated effects which must be taken into consideration in a proper assessment of the risks.  Local elections are due in Portugal in 2017. 

Companies claiming to have unusually fast development trajectories are especially prone to disappoint investors when the priorities of slower moving governments take over. Until there is clearer evidence of the acceptability of the project to the local community and no evident impediments to a speedy approval by the central government, the risk of regulatory delay remains elevated.

• Identification of market opportunities for lithium producers remains critical.  While the company has forcefully put its case for being located in Portugal to gain access to the likely expansion of battery production within the common market, it has not reported any agreements and there are other companies looking at how to pursue the same strategy.  This is the highest risk factor facing the company.

• Opportunity costs have risen as the company has passed the point at which near term exploration results or single events might drive an acceleration in investor returns and now faces a lengthy period in which all the necessary steps toward development must be completed in a timely fashion to sustain acceptable investment outcomes.   

Scope for Future Rating Reappraisal
The PortfolioDirect rating is based on publicly available information at the time of writing.  Dakota Minerals intends pursuing a program of work with the potential to achieve an improved rating outcome.  Materially improved ratings could arise from confirmation about the metallurgical characteristics of its Sepeda deposit in the near term  Later, clearer definition of its customers and relevant government approvals will raise confidence in development proceeding.