Market Awakening to Strong Fundamentals

Report Highlights

• The flagship Adumbi deposit hosts a large/high-grade resource totaling 3.7 Moz gold (2.3 g/t). A 2021 Preliminary Economic Assessment (PEA) returned an AT-NPV5% of $1B, and an attractive AT-IRR of 29%, using $1,840/oz gold vs the spot price of $2,760/oz. LN is trading at just 5% of the AT-NPV. 
• We note that the Imbo area has significant resource expansion potential as the Adumbi deposit remains open at depth, and multiple targets have not been drill-tested. 
• With gold trading near record highs, we anticipate an increase in M&A activity over the next 12 months, as larger companies target juniors to grow their portfolios. Adumbi has potential to produce 300+ Koz ever year, making it a mid-sized gold mine.
• Loncor remains an attractive M&A target. Relative to other gold juniors, LN is trading at a 56% discount (C$30/oz vs the sector average of C$68/oz, assuming 100% of measured and indicated resources, and 50% of inferred resources).  We believe the market is undervaluing Loncor by focusing on the challenges associated with operating in the DRC, while overlooking the potential for value creation through strategic partnerships or acquisition.

Price Performance (1-year)

Mining in the DRC: Opportunities and Risks

The Democratic Republic of the Congo (DRC) is a key player in global mineral production, with significant reserves of cobalt, copper, gold, and other critical minerals. Rising demand for copper and cobalt, driven by the transition to renewable energy, is drawing growing interest from global investors to the DRC's abundant resources. While the country possesses immense mineral wealth, its mining sector faces persistent challenges, including political instability, security concerns, and inadequate infrastructure. Despite these hurdles, the DRC continues to attract major international mining companies, driven by the allure of its vast mineral resources

The DRC: A global mineral powerhouse. Despite ongoing conflicts, several majors remain active in the DRC

• Cobalt: The DRC remains the world's leading producer of cobalt, a crucial component in the production of electric vehicle batteries. Major players in the cobalt mining sector in the DRC include Glencore (LSE: GLEN), China Molybdenum (SEHK: 3993), and Eurasian Resources Group.
• Copper: The DRC is the second-largest copper producer in Africa. Major producing companies in the country include Glencore, CMOC Group (SEHK: 3993), Zijin Mining Group (SEHK: 2899), Ivanhoe Mines (TSX: IVN), China Minmetals, and Jinchuan Group (SEHK: 2362). 
• Gold: The DRC is a significant gold producer in Africa, with companies like Barrick Gold (TSX: ABX), and AngloGold Ashanti (NYSE: AU), operating mines within the country.

Majors often employ strategies to mitigate risks, such as forming partnerships with local communities and government agencies, and investing in security measures to protect their operations. The recent resurgence of the M23 rebel group in eastern DRC has posed notable security challenges. However, these issues have been largely localized, and have not affected the operations of Barrick's Kibali Mine or Loncor's exploration.

The US, EU, and DRC are collaborating to improve mining, and ensure responsible sourcing of cobalt and copper. Their efforts, centered on sustainability, community support, and higher environmental and social standards, will likely increase the investment attractiveness of the country.

For a junior like Loncor, we believe a successful outcome involves being acquired by a larger player with established operations, and a strong understanding of the operating environment in the DRC. We believe the market is evaluating Loncor's potential based on its ability to independently advance the Imbo project, raising concerns about the challenging operating environment in the DRC. This likely explains why the stock is trading significantly below its intrinsic value. According to management, limited marketing and investor awareness campaigns have also contributed to LN trading well below sector multiples. In our view, the market’s focus should shift to the project's strong fundamentals, and management's ability to secure strategic partnerships (such as through a potential acquisition or joint venture), along with the company’s exploration and marketing initiatives.

Path to unlocking value

Imbo Project

Located in the Ngayu gold belt of northeastern DRC, 220 km from Barrick’s Kibali gold mine. Ngayu hosts Banded Ironstone Formation (BIF) gold deposits, which are typically large-tonnage

Should the project advance to production, management envisions hydro power as a viable source, which is a significant factor contributing to Kibali's low cash costs

The advanced-stage Imbo project hosts three open-pittable deposits (Adumbi, Kitenge, and Manzako), and multiple targets, along a 14 km long mineralized trend. These three deposits are 3 km from each other, and can likely be part of the same mine plan

Most of Imbo’s resources come from Adumbi. Adumbi holds a relatively high-grade/large open-pit resource. Resources surged 169% since 2020

The Adumbi deposit has been drilled along 900 m strike, and 550 m downdip. The open-pit resource grade at Adumbi (3.7 Moz at 2.3 g/t Au) is comparable to that of Kibali’s open-pit and underground resources (16.9 Moz at 3.1 g/t Au) 

A PEA completed in 2021 returned an AT-NPV5% of $1B, and a high AT-IRR of 29%, using $1,840/oz gold vs the current spot price of $2,760/oz. Annual production of 303 Koz, which would make it a mid-sized gold producer

LN is pursuing a resource expansion drill program (nine holes/11,000 m) to potentially delineate underground resources below the open-pit shell. Management has assigned an exploration target of 1.5 Moz (4.8 g/t) below the Adumbi pit-shell, between depths of 550 and 800 m.

Adumbi is open at depth with significant resource expansion potential to a depth of 800 m below surface

LN has conducted scout drilling to test targets in the Imbo East area, located 8 to 12 km southeast of Adumbi, outside the current resource areas. Earlier this month, the company announced promising results from nine holes totaling 2,113 m, with depths ranging from 160 to 320 m.

Key results included 6.30 m @ 5.53 g/t, 5.05 m @ 5.28 g/t, 1.58 m @ 12.26 g/t, and 1.18 m @ 69.7 g/t 

Potential for resource expansion

Management’s long-term plan is to delineate a mining district along the 14 km-long Imbo trend.

Financials

At the end of Q3-2024, LN had $5.3M in working capital

Comparables Valuation

African gold juniors are trading at C$68/oz (previously C$58/oz)

LN is trading at C$30/oz (previously C$19/oz), reflecting a 56% discount. Applying C$68/oz to LN’s resources, we arrived at a comparables valuation of C$1.13/share (previously C$0.87/share

DCF Valuation and Rating

We are reiterating our BUY rating, and raising our fair value estimate from C$0.80/share to C$1.57/share (the average of our DCF and comparables valuations). The company possesses a significant gold resource, supported by robust project economics. Despite its strong fundamentals, Loncor trades at a significant discount to its peers. With ongoing exploration efforts, and the potential for strategic partnerships or acquisitions, we believe Loncor presents a compelling opportunity for those seeking exposure to gold equities. 

Risks

We believe the company is exposed to the following key risks: 

• The value of the company is dependent on gold prices
• Geopolitical 
• Exploration success
• Potential for share dilution
• Delays in project financing
• FOREX