Cygnus the next big opportunity in James Bay lithium

ASX: CY5                                         Share Price: 30c
Shares on Issue: 214m            Market Cap: $66M

OP2

In a Nutshell:

Cygnus Metals is exploring for lithium in James Bay, Canada. It has three separate projects at different stages of the exploration cycle.
The flagship project is Pontax, where Cygnus is set to announce a maiden resource in coming weeks. Cygnus has barely scratched the surface at Pontax, with the mineralisation open in all directions and numerous targets to be tested. 

At the Auclair project, drilling is expected to commence in early August to follow up on known spodumene-bearing pegmatites. These pegmatites returned significant grades from resampling of historic drilling, including 9.8m at 0.8% Li2O from 212.8m, including 5.1m at 1% Li2O and 1m at 1.2% Li2O.

The third James Bay project in the Cygnus stable is Sakami, which sits just 44km from Patriot Battery Metals’ huge Corvette lithium project. Cygnus has already outlined dozens of pegmatites at Sakami ahead of the maiden field campaign.

In addition to its three lithium projects, Cygnus has recently made a significant rare earths discovery in WA. Located in Bencubbin in the WA wheatbelt, the project has returned two batches of strong assays which reveal thick, shallow, clay-hosted high-grade rare earths. The mineralisation has been defined over 2.3km and remains open. Drilling is set to resume this month.

 

The People:

The enormous potential of Cygnus’ projects is demonstrated by the star-studded line-up in its Board and management team. The Managing Director is David Southam, a highly experienced MD and CFO. Southam was most recently MD at nickel miner Mincor Resources, which has just been taken over by Andrew Forrest. 

Cygnus hails from the Bellevue Gold (ASX: BGL) stable, as shown by the composition of its Board. The Chairman is Kevin Tomlinson, a Canadian resident with extensive connections and experience in North America. Tomlinson is also Chairman of Bellevue. Fellow Bellevue Director Michael Naylor is on the Cygnus Board, as is former Bellevue Chairman Ray Shorrocks and former Mincor Director Michael Bohm.

Cygnus also has a wealth of experience to draw on at management level, with Bellevue founding MD Steve Parsons acting as a corporate consultant - he also has 5 per cent of the Company - and highly regarded lithium expert Mark Calderwood an advisor to the Board.

What do the brokers say?

Canaccord:

Speculative Buy
Price Target: 60c


Canaccord says: “Cygnus has one of the largest land packages in a leading lithium district. It has opportunistically built a portfolio of lithium exploration projects in major greenstone belts in Quebec. This gives Cygnus one of the largest lithium exploration footprints in Quebec. We note the number of lithium development projects in the province and continue to see Canada as an emerging and strategic lithium producing region given proximity to growing end markets (US), established mining culture and sustainability credentials.

“CY5 expects to release a maiden Resource for Pontax, with reported drilling suggesting the potential for initial Resources of 7Mt at 1.2%. However, we see upside potential through the possibility of extending known strike and/or confirmation of continuity between parallel dykes, noting extensional drilling is set to commence in SepQ. Should this be proved by further drilling, we see potential for Resources to significantly exceed our initial estimates.

“We value CY5 based mostly on a Resource multiple applied to the Pontax project. Based on our peer group average Resource multiple of US$10/t and a nominal value ascribed to exploration potential at other projects, we set an initial target price of $0.60. We see an expected maiden Resource at Pontax as forming a valuation base, but with our view of significant exploration potential at its other projects, we launch with a speculative buy rating”.


Shaw and Partners

Recommendation: Buy
Price Target: 46c


Shaws says: “We initiate coverage of Cygnus Metals with a buy recommendation and $0.46 price target. Pontax is an outstanding opportunity for Cygnus to create value. With 44km of strike along a fertile greenstone belt, Pontax remains underexplored.

“Cygnus has a highly experienced board and management team with a track record of exploration success and taking companies through development into production. MD David Southam previously led Mincor Resources from greenfield discovery to production in a three-year period.

“We expect Cygnus to declare a maiden resource at Pontax of between 7 and 12mt at 1.2% Li2O in July 2023 and for this to grow significantly over the next 12 months and beyond. Cygnus is trading at a substantial discount to its hard rock developer peer group at the mid-point of our 7-12mt range”. 


Euroz Hartleys

Recommendation: Speculative Buy
Price Target: 45c


Euroz Hartleys says: “Cygnus management and board have a history of being very commercial and bringing mines into production.  If current high spodumene prices persist, we envisage a scenario whereby DSO ore could be trucked to nearby proposed concentrators and ultimately converters.   The project location near road infrastructure and with advanced approvals leads itself to low risk and fast development. 

“We estimate that drilling to-date suggests a maiden resource at Pontax in the order of 7-12mt.  The maiden resource is expected early in Sept Qtr. Extensional drilling in August could expand tonnage potential”.

 

What the Leading Commentators say:

Highly regarded resources writer Barry FitzGerald:

“The broader point here is that the market is well and truly switched on again to lithium exploration results. The same could be said for maiden lithium resource estimates.

“That is a position Cygnus Metals (CY5) finds itself in northern Quebec where wildfires have been dominating the headlines of late.

“Cygnus’ lithium prospects are in the James Bay region. The most advanced is Pontax where the market is expecting a 7-12Mt maiden resource to be announced early in the Sept quarter.

“Euroz Hartleys has a 45c price target on the stock which is trading at 22c for an market cap of $47 million.

“The broker made the point in a research report that by rough rule of thumb, and remembering Pontax is still at the exploration stage, every 10Mt of spodumene could be considered to have an exploration value of $80-$120m.

“It adds that every 10Mt of resource that has a clear pathway to production could be said to have $150-$300m of “speculative development value.’’

“Pontax is not on the development pathway just yet but as Shaw & Partners – it has a 46c price target on the stock - noted in a Cygnus note this week, the maiden resource estimate is likely to be just the beginning.

“In addition to Pontax, Cygnus is about to get cracking on the Auclair prospect where a review of historical records (it has never been explored for lithium specifically) identified the presence of 67 pegmatites and the presence of the spodumene (up to 1.2% lithia).

“It is on the same greenstone belt that is home to 34Mt and 55Mt deposits owned by others. Drilling is planned to start next month, all going well.

“Almost as an aside, Cygnus has a rare earths “team’’ back in  WA that has just notched up a discovery at the Bencubbin project.

“Results included 19m at 1,541ppm total rare earth oxide with a high magnet metal count overlying a granite. Another one to watch at Cygnus”.

 
Leading finance commentator Tim Treadgold writing on the Small Caps newsite:

“It’s a long way from the dusty wheatbelt of WA to the forests of Canada but there is a small explorer with a plan to connect the two locations through a focus on energy transition, lithium in Canada and rare earths in WA.

“Cygnus Metals (ASX: CY5), which had an indifferent early life as a WA gold explorer when it was called Cygnus Gold, woke with a jolt last year when it acquired a 70% stake in the Pontax lithium project in Quebec.

“That deal was the start of a major makeover which has included the recruitment of a skilled management team led by David Southam, former chief executive of the WA nickel miner, Mincor, followed by the appointment in March of Kevin Tomlinson, a well-connected Canadian businessman, as chairman.

“Injections of capital ensured that Cygnus could fund its work in Canada and Australia which this week moved up a notch with a decision to bring forward project development studies ahead of the release of a maiden resource at Pontax, which is located in the highly prospective James Bay area of Quebec.

“Lithium, however, is not the only target of Cygnus with the company’s original gold exploration project flipping into a promising rare earths project after the discovery of clay-hosted rare earths near Bencubbin, in the heart of the WA wheatbelt.

“Managing two projects focused on different commodities on either side of the world will be a challenge for a company with a modest stock market capitalisation of $60 million and with a cash balance of just $8 million at the end of March.

“But with both lithium and rare earth exploration showing promise there will always be ways to monetise assets, perhaps by as spinning one into a separate business.

“A split like that could be a future move for Cygnus, which has been an unrecognised star among smaller stocks over the past two weeks, rising by 40% from 20c to last sales at 28c, and a high on Tuesday of 30c.

“There are multiple drivers behind Cygnus, including its status as one of many small Australian explorers active in Canada, the promise of rare earths in WA, and perhaps most important of all but rarely seen in such a small stock, an A-grade management team which understands the importance of money as well as minerals.

“Pontax, the project most likely to be the company’s first mine, was acquired by Cygnus from Canadian listed Stria Lithium in late July last year with early-stage drilling revealing a number of attractive intersections, including 4.8 metres at an ore-grade of 2.6% lithium from a shallow 19.4m.

“That news was followed by the appointment of Southam in October accompanied by a $6.3 million capital raising. Another $8 million was raised just before Christmas to fund a busy drilling schedule which was followed by a boardroom shuffle which saw Tomlinson, who is also chairman of emerging Australian goldminer, Bellevue, take the chair.

“There is, to an observant investor, a pattern forming which is often seen in successful exploration companies on the road to becoming a miner, it’s called getting the ducks lined up in a structured manner to ensure a successful outcome.

“Over the past three weeks Cygnus has made a number of significant announcements and started to attract the attention of the broking community.

“On May 22 it upgraded the exploration potential of its Canadian tenements with a report that 67 lithium bearing pegmatites with grades up to 1.2% lithium had been identified at Auclair, the company’s second project in the James Bay area, adjacent to Pontax.

“That was followed on this week with an announcement of the initiation of project development studies of Pontax, starting with an environmental base line report, with the maiden resource statement expected in the next two months.

“Splitting those reports was a reminder that the Bencubbin rare earth search has not been forgotten with a June 7 announcement that initial assays had included 19m at 0.15% total rare earth oxides from a depth of 8m, including 4m at 0.24% from 16m.

“High readings of the most valuable rare earths, neodymium and praseodymium, were recorded in the drill core which is focused on a 49m thick band of clay over a rare earth enriched granite which Cygnus said indicated the potential for significant scale potential.

“Interestingly, Cygnus said two much bigger companies are exploring for rare earths in the Bencubbin area, Rio Tinto (ASX: RIO) and IGO (ASX: IGO), though neither company appears to have filed details of their work.

“A clue to the grand plan being hatched inside Cygnus was a paragraph in the June 7 statement which said that lithium and rare earths were “highly complementary” because of their role in energy transition which might indicate that the company plans to persevere with its Canadian lithium and Australian rare earths project development plans.

“Euroz Hartleys, a Perth stockbroker, has latched onto the Cygnus story with a report which said the stock was a speculative buy with a price target of 45c thanks to a busy drilling program starting next month at Pontax and Auclair.

“Shaw and Partners, in a June 7 note, said 46c was the target price though like Euroz largely ignored the Bencubbin rare earth project while focusing on the Canadian lithium.

“Despite its small size, Cygnus has emerged over the past 12-months as a company punching well above its weight with high-class exploration assets and a management team which knows how to make things happen”.

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17th February 2022
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