Cadence Minerals — A mispriced miner

Cadence Minerals (AIM: KDNC)

Last close As at 22/06/2024

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Research: Metals & Mining

Cadence Minerals — A mispriced miner

Cadence Minerals is a mining-focused investment company with unlisted investment assets that the market appears to be clearly mis-pricing. Its portfolio of public equities accounts for £10.2m of its £12.7m market cap, leaving an implied combined value of £2.5m for its 30% stake in the Amapá iron ore project and its minority stake in the Sonora lithium project. In our view each of these is worth more than this, and we believe a conservative base-case valuation of both to be £45m or 26p/share at their current stages of development. This values Cadence at 32.2p/share, more than four times its current valuation. Our high-case valuation is 57p/share.

Written by

Andrew Keen

MD - Head of Content, Energy & Resources, Industrials

Metals & Mining

Cadence Minerals

A mispriced miner

Initiation of coverage

Metals and mining

6 July 2023

Price

7.4p

Market cap

£13m

Net cash (£m) at 31 December 2022

0.1

Shares in issue

172.7m

Free float

100%

Code

KDNC

Primary exchange

AIM

Secondary exchange

AQSE

Share price performance

%

1m

3m

12m

Abs

(9.4)

(20.5)

(23.5)

Rel (local)

(7.2)

(18.4)

(27.1)

52-week high/low

16.6p

7.4p

Business description

Cadence Minerals is an early-stage investment and development company in the mining space. Its public equity holdings include rare earths and lithium developers, and its non-listed interests include lithium in Mexico and a 30% interest in the Amapá iron ore restart project in Brazil.

Next events

FY23 results

TBC

Analysts

Andrew Keen

+44 (0)20 3077 5700

Andrey Litvin

+44 (0)20 3077 5700

Tom Batho

+44 (0)20 3077 5700

Lord Ashbourne

+44 (0)20 3077 5700

Cadence Minerals is a research client of Edison Investment Research Limited

Cadence Minerals is a mining-focused investment company with unlisted investment assets that the market appears to be clearly mis-pricing. Its portfolio of public equities accounts for £10.2m of its £12.7m market cap, leaving an implied combined value of £2.5m for its 30% stake in the Amapá iron ore project and its minority stake in the Sonora lithium project. In our view each of these is worth more than this, and we believe a conservative base-case valuation of both to be £45m or 26p/share at their current stages of development. This values Cadence at 32.2p/share, more than four times its current valuation. Our high-case valuation is 57p/share.

Year
end

Income*
(£m)

PBT**
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

10.4

7.8

6.9

0.0

1.2

N/A

12/21

1.2

(0.1)

(0.1)

0.0

N/A

N/A

12/22

(4.0)

(5.5)

(3.4)

0.0

N/A

N/A

12/23e

0.0

(1.8)

(1.1)

0.0

N/A

N/A

Note: *Income represents unrealised/realised profits and losses on financial investments. **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Amapá stake worth more than Cadence

Our risk-adjusted (for its stage of development) valuation of the 5.2Mtpa Amapá iron ore project in Brazil is US$154m/£122m (Cadence share £37m, or 21p/share). This is based on an unrisked valuation US$978m (NPV, 100% basis, 10% discount rate). This project, of which Cadence own 30%, is at pre-feasibility study (PFS) stage, but importantly is potentially a brownfield refurbishment and restart rather than a greenfield iron ore mine. Our valuation is similar to the PFS NPV10 of US$932m and allows for significant capital reconstruction and refurbishment. Cadence has multiple paths to creating additional value at Amapá by continuing to build its stake (it has first right of refusal up to 49%) and continuing to de-risk towards full bankable feasibility study (BFS) status, which should be relatively straightforward given its history as an operating mine.

Valuation: A significant discount to sum of the parts

Cadence is an AIM-listed, mining-focused investment company with a portfolio of minority stakes in mining projects. The current value of its major listed equity is equivalent to 81% of its market value. These holdings include 6.5% of European Metals Holdings, 1.9% of Hastings Technology Metals and 8.7% of Evergreen Lithium. We calculate a base-case sum-of-the-parts (SOTP) valuation for Cadence’s portfolio at 32.2p/share, with a high-case valuation of 57.1p/share as Amapá is de-risked through progressing to full BFS and Sonora progresses towards production. The market appears to be placing very little value on these assets, but we see both of these catalysts emerging in time (and a JV partner in Amapá at the project level is the most likely potential catalyst in the nearer term). Risks include further project delays, political uncertainty in Mexico and broader commodity price cycle risks.

Investment summary

Company description: A mining focused investment firm

Cadence Minerals is a UK-based early-stage investment and development company in the mineral resource sector. It is listed in the UK on the AIM market (AIM: KDNC) and the Aquis Stock Exchange (AQSE). It holds minority stakes in a range of exploration and development assets, principally in energy transition metals such as lithium and rare earths. It does not seek to be an operator or primary developer of assets (it has a small, investment focused team), but creates value by identifying mining assets than could rise in value through progressive de-risking. Cadence has been historically focused on energy transition metals (notably rare earth minerals and lithium), but its major non-listed investment (and a core focus for the company at present) is the Amapá iron ore project in Brazil. Its unlisted assets also include a 30% stake in some tenements that form part of the Sonora lithium project in Mexico.

Valuation: A SOTP discount

We value Cadence using a sum-of-the-parts (SOTP) methodology based on the value of its investment portfolio. We use the current market valuations for its listed equity investments, a risk-adjusted (for stage of development) share of NPV for Amapá and a takeout multiple for its stake in Sonora.

We do not see any justification for applying a discount to a portfolio or SOTP valuation. Cadence’s listed equity investments are minority stakes in liquid public companies and would be realisable for full market value. Cadence’s unlisted stakes are also minority stakes and either attractive to a major partner (such as Ganfeng in the case of Sonora) or to other potential entrants, so we see possible trade sales in the longer term as clear catalysts to the realisation of full value.

Cadence’s commodity exposure is favourable in our view, with exposure to rare earth minerals and lithium, which both have strong structural end-use demand, and iron ore, where we see continued need for projects such as Amapá in the longer term. Our views for each of Cadence’s main commodities are contained in the appendix to this report.

Cadence is a relatively small investment company in a sector that is dominated by large capital, and therefore will not be on the radar of many professional and private investors who follow mining. It is also relatively small in a corporate sense, so management is focused heavily on de-risking its assets and creating long-term value. It is in this context that the de-risking and growing investment stake in Amapá has probably been overlooked by the wider market, and led to the discount emerging.

In terms of catalysts, the progression of Amapá to full DFS status would lead to a reduction in the discount we apply (and the discount that is applied by the market). The costs and timing of this are uncertain, but the orebody is well understood given its prior operating status, so the progression will centre on licensing issues and further engineering studies. Cadence could progress this itself (and has recently secured mezzanine debt funding to achieve this if it wishes) or bring in potential partners at the asset level.

The development and progression of the Sonora lithium project is more uncertain given political uncertainty in Mexico (although we understand that Sonora is not affected by the changes in Mexican legislation given its licensing status, however the market is likely to continue to treat Mexican lithium assets with some caution). Our valuation of Sonora allows for this risk, so any progression to full operation by Ganfeng would be a clearly positive catalyst. The lithium market will need assets like Sonora in the longer term, and there is potential for this asset to be larger than the BFS metrics on which the takeover was made and our valuation is based.

Exhibit 1: Valuation of Cadence Minerals (on a portfolio SOTP basis)

Shares in issue (m)

Stock price (A$)

Stock price (£)

Market cap (£m)

Cadence stake

Value of Cadence stake
(£m)

Value of Cadence stake/share (p/share)

Major listed investments

European Metals Holdings

192

0.42

81

6.5%

5.2

3.0

Hastings Technology Metals

129

1.64

0.85

110

1.9%

2.1

1.2

Evergreen Lithium

181

0.33

0.17

31

8.7%

2.7

1.6

Miscellaneous

0.2

0.1

Total of major listed investments

10.2

5.9

Cadence Minerals market valuation

12.7

7.4

Implied value of non-listed investments

2.5

1.4

Unlisted investments

NPV value ($m)

Discount

Risk adjusted ($m)

Risk adjusted (£m)

Cadence stake

Value of Cadence stake
(£m)

Value of Cadence stake/share (p/share)

Amapá PFS NPV10 (Edison)

978

84.2%

154

122

30%

36.5

21.1

Sonora valuation (base case)

9

5.2

Value of listed and unlisted investments

55.7

32.2

Source: Edison Investment Research. Note: Prices as at 4 July 2023. Exchange rates used: US$1.27/£, £0.52/A$.

Risks and sensitivities

Cadence’s investment risks relate to development risk and commodity price volatility. Both of these are common to early-stage mining developers, and we have explicitly allowed for some political and development risk in our valuation. As with all mining firms, commodity prices can be volatile in relation to the broader global macroeconomic environment.

The largest non-commodity related risk to our valuation is probably further delay to the licensing process at the Amapá project. Mining projects in all jurisdictions do experience unexpected delays, and it is possible that the Brazilian authorities may require additional environmental studies relating to mining operations or tailings dam operations prior to granting licences to operate. We value Amapá at 15.8% of its de-risked NPV valuation (10% discount rate), but it is possible that the project could experience further delays.

There is also scope for political uncertainty around lithium mining licensing in Mexico that could cause a delay in the development of the Sonora lithium project by Ganfeng Lithium. While we believe that the operation has secure licences under the revised legislation, uncertainty could delay the development of this mine. We have applied a 50% discount to the historical takeout valuation in our base case to reflect this uncertainty.

Company description: Profiting from de-risking

Cadence’s investment process is focused on identifying assets with strategic advantages and working closely with management teams to de-risk assets and, once optimal valuation is reached, to exit in part or in whole to reinvest capital for further growth.

Cadence’s major listed investments include:

a 6.5% holding in European Metals Holdings (ASX and AIM: EMH),

a 1.9% holding in Hastings Technology Metals (ASX: HAS), and

an 8.7% holding in Evergreen Lithium (ASX: EG1).

It focuses on assets that fit its broad investment themes, which include:

Minerals & metals – new energy, select bulk, base and precious.

Stage – exploration through to production.

Geography – established mining jurisdictions.

Returns – capital growth.

Process – disciplined investment process including strategic, financial and ESG due diligence.

Cadence’s criteria for new investments include:

Origination – transaction sourced from a network of strong relationships.

Structure – debt, equity or equity-linked structured investments with investment enhancement and protection mechanisms.

Representation – seeks active participation in private investments and board participation in listed investments.

Management – high-quality management teams.

Cadence’s minority stakes in publicly listed investments are outlined below. We adopt market prices for these in our valuation of Cadence, but also note that they are in industries that we believe have strong cyclical demand conditions. The spot prices for rare earths and lithium have been cyclically weak in recent months.

Major listed company interests

European Metals Holdings

Cadence Minerals holds 6.5% of European Metals Holdings (ASX: EMH, AIM: EMH), with a current market valuation of £5.2m. This holding was placed in escrow as security for Cadence’s mezzanine debt facility (see the discussion of this in the Financials section below). Cadence’s CEO Kiran Morzaria is a non-executive director of EMH.

EMH holds 49% of the Cinovec hard rock lithium project in the Czech Republic. Czech power company CEZ Group holds the balance at the project level and is heading a consortium to build a lithium battery plant. CEZ Group is 70% owned by the Czech Republic and is one of the 10 largest energy companies in Europe, with 28,000 employees and a market capitalisation of approximately €17bn.

The Cinovec project is fully funded through to final investment decision (FID). It is a significant lithium project in a global sense and of strategic importance to European lithium supplies. The project also enjoys strong political support, and was visited in May 2023 by Czech Prime Minister Petr Fiala, who commented publicly on the role of the project in creating an entire value chain for the production of lithium batteries.

Cinovec is the largest hard rock lithium deposit in Europe and the fifth largest non-brine deposit in the world. Its characteristics include:

The project is located in the Krušné Hory Mountains between the Czech Republic and Germany, approximately 100km from Prague and in a historical mining region.

The ore can be mined using underground mining (long hole open stoping) and wet magnetic separation to produce a lithium concentrate that is then further processed.

The resource is 7.39Mt lithium carbonate equivalent (LCE) (0.34Mt LCE measured, 3.88Mt LCE indicated and 2.87Mt LCE inferred).

The mine plan indicated a 25-year life of mine producing 29.4ktpa of battery-grade lithium hydroxide, lithium carbonate and a high-grade tin concentrate. This would require 13.1% of measured and indicated resources and 7.7% of total resources.

The January 2022 PFS indicated a US$1.94bn NPV (based on an 8% discount rate, capex of US$644m and a US$17,000/t lithium hydroxide price)

The project now requires permitting for mining and processing, a definitive feasibility study (DFS) and front-end engineering design (FEED), and further work in offtake agreements and pre-qualification of test samples.

Hastings Technology Metals

Cadence had long held a stake (30%) in several mineral concessions that form part of the Yangibana rare earths project in Australia. In January 2023, it exchanged this stake for 2.45m shares (1.9% of the issued shares) in ASX-listed Hastings Technology Metals (ASX: HAS). This stake has a current market valuation of £2.1m. We are adopting the market valuation for this holding, although we highlight below that Hastings’ share price is highly correlated with neodymium and praseodymium (NdPr) prices, which we see as cyclically weak and well below longer-run prices.

This trade of assets for a share in the listed entity was a win-win trade in our view, giving Hastings full control of mining tenements surrounding its core asset as well as providing Cadence with a visible market valuation for its rare earths assets.

Yangibana is a high-quality rare earths project that, in our view, will be needed as a source of global supply of critical raw materials. Rare earths are important for the energy transition (see the appendix of this report for a full discussion), and Yangibana is a project with advanced support from both consumers and governments. First production is planned by the end of 2025. Hastings has recently announced a staged development strategy and revised capital costs, which the market has reacted to negatively (and NdPr prices have also been cyclically weak); however, this is a high-quality project that is needed as part of longer-term NdPr global supply. Any issues with Yangibana are a reflection of wider challenges in building new sources of rare earths supply (and will ultimately be more than compensated for by supply constrained price rallies in our view).

The ‘staged development strategy’ announced on 31 May separates the development of the mine and concentrator (Stage 1) from the development of a hydrometallurgical plant to crack the concentrate into a mixed rare earth carbonate (Stage 2).

Stage 1 was indicated to have a capital cost of A$470m, a post-tax NPV of A$538m and annual EBITDA of A$174m, which would provide cash flow for the funding of Stage 2. This plant will produce 37ktpa of 27% total rare earth oxide (TREO) grade concentrate, with first production in Q125. Hastings entered into a binding A$210m engineering, procurement and construction contract in May 2023 with GR Engineering. This reduced the construction cost risk for this portion of the project considerably. This contract includes the design, construction, installation and commissioning of the Yangibana beneficiation plant.

Stage 2 will cost an additional A$478m (for a total product capital cost of A$948m). The total capital cost is 40% higher than 2020/21 estimates. This product will be shipped to a downstream hydrometallurgical plant in Onslow on the Western Australian coast to ‘crack’ the concentrate to a 59% mixed rare earth carbonate (MREC) product (15ktpa). This will contain 3,000–4,000tpa of NdPr (the rare earths critical for high-strength magnets), representing 6–8% of global demand when it comes online.

Exhibit 2: Yangibana project metrics (as of May 2023)

Stage 1

Stage 2

Standalone

From Stage 2 FID

Post-tax NPV11 (ungeared)

A$538m

A$1,018m

Post-tax internal rate of return (ungeared)

27.54%

51%

Payback period

4.4y

2.1y

Net revenue (life of mine)

A$7.2bn

A$11.1bn

Free cash flow (life of mine)

A$1.83bn

A$2.44bn

Average EBITDA per annum

A$174m

A$251m

Source: Hastings Technology Metals update presentation 31 May 2023

The project has received strong government support, including a A$100m non-binding conditional letter of support (in March 2023) and a A$220m debt commitment from the Northern Australia Infrastructure Facility (NAIF), under the original integrated project plan. Hastings is working with lenders and funders to complete funding for Stage 1 by the end of September 2023.

NdPr are metals critical for energy transition, as they form the basis of the strongest commercial magnets available. These are not battery metals, but are used in electric motors and generators. They enable wind turbines to increase efficiency and lower maintenance costs, and increase the efficiency of electric vehicle (EV) motors by approximately 3%, extending range or cutting the need for additional battery capacity. Please see the appendix of this report for further information.

The Yangibana project DFS assumes an NdPr oxide price of US$112/kg over the life of mine and its updated project economics presentation (31 May 2023) assumes US$129/kg. Spot prices have been falling since a peak in early 2022 and at US$80–85/kg are now below the prices assumed by Hastings in the original DFS and updated projected economics release. In our view this represents cyclical market weakness rather than a more permanent structural decline.

NdPr markets are historically very volatile; the charts below show how Hastings’ stock price has been strongly correlated with NdPr prices in recent years, and NdPr oxide prices over 15 years. Prices gravitated towards US$50/kg from 2013–20, prior to the acceleration in demand and in nominal terms. The cost inflation and delays in bringing on a high-quality project such as Yangibana are industrywide, and will lead to a rise in market equilibrium prices and incentive prices needed for new projects. NdPr demand is accelerating due to its use in both energy generation and energy transmission in EVs. We value Cadence’s stake in Hastings at its current market valuation, but see significant scope for commodity prices as well as project advancements to be positive catalysts for this stake.

Exhibit 3: NdPr prices and Hastings stock price

Exhibit 4: NdPr oxide price, 2008–present, US$/kg

Source: Bloomberg. Note: Last date 30 May.

Source: Bloomberg. Note: Last date 30 May.

Exhibit 3: NdPr prices and Hastings stock price

Source: Bloomberg. Note: Last date 30 May.

Exhibit 4: NdPr oxide price, 2008–present, US$/kg

Source: Bloomberg. Note: Last date 30 May.

Evergreen Lithium

Cadence Minerals owns approximately 15.8m shares in ASX-listed Evergreen Lithium (equivalent to 8.7% of the issued capital), with a current market valuation of £2.7m. Cadence established this position by selling its interests in two private companies (a 31.5% stake in Lithium Technologies and Lithium Supplies in June 2022. Evergreen listed on the Australian Securities Exchange on 11 April 2023. Cadence has a two-year lock in for its stake in accordance with ASX rules.

A further A$3.47m (£1.86m) of shares in Evergreen are due to Cadence on the achievement of certain performance milestones by Evergreen (the pricing of these shares is based on a defining pricing mechanism, and depends in part on the date these performance milestones are achieved). We have not included these additional shares in our valuation.

Evergreen is a relatively early-stage lithium exploration play and is focused on advancing three hard rock lithium prospects in Australia, namely:

The Byone lithium project, located in the Northern Territory and adjacent (and contiguous) to Core Lithium’s producing lithium mine. It covers the north-eastern strike extent of the lithium-and tantalum-endowed Bynoe pegmatite field.

The Kenny Lithium project, located within the Dundas Mineral Field of Western Australia, close to Mt Dean and Mt Belches-Bald Hill pegmatite fields. Initial field mapping on the project has confirmed the presence of substantial outcropping pegmatites.

The Fortune lithium project, located near Arunta in the Northern Territory.

On 28 June, Evergreen Lithium announced it had released results from preliminary Ambient Noise Tomography (ANT) geophysics surveys at its Byone project. This technique is a ground geophysics approach that uses natural or man-made seismic noise to measure the seismic velocity in three dimensions, with the intention of identifying lithium-bearing pegmatites (or blind pegmatites) at depth. At Bynoe this work appears to have enabled the imaging of the subsurface down to 500m, which, along with geochemical and geological interpretations, will help guide a maiden drilling program. Preliminary analysis of the ANT surveys indicated multiple large scale potential pegmatite targets at Bynoe, which is located continuous to Core Lithium’s (ASX: CXO, market cap $A1.8bn) Finnis project (30.6Mt at 1.31% Li2O).

Amapá

History

Cadence owns 30% of the Amapá iron ore project in Brazil. It is a mothballed iron ore mine rather than a greenfield project. The mine first operated in 2007 under its original owners, MMX Mineracao e Metalicos SA (MMX) (70%) and Cleveland-Cliffs (30%). Anglo American bought MMX’s stake in 2007 and operated the mine until a ground failure at the port in March 2013. This eventually led to the cessation of mining in 2014. Importantly, the mine operated for just five years, so while the processing plant, railway and port require extensive rebuilding, the unmined portion of the orebody is still in-situ.

While historical valuations do not read straight across into current values (and we value the operation using its PFS data below), this operation has been valued by major players in the mining industry as a near operating or fully operating asset. A few examples of previous valuations include:

Cleveland-Cliffs bought 30% of Amapá in March 2007 for US$133m, valuing Amapá at US$443m. The mine was still in development and required further capital contributions by Cleveland-Cliffs through to completion.

The mine was purchased by Anglo American as part of its US$5.5bn purchase of MMX’s iron ore assets in 2008, which included the then undeveloped Minas Rio iron ore mine. No separate value was, to our knowledge, publicly placed on the Amapá portion of the acquisition, but it was a significant part of the purchase.

Anglo American subsequently valued the entire project at US$1.2bn. Prior to selling the operation in 2012, it impaired the value of the project (on a 100% basis) to US$660m.

Anglo American and Cliffs agreed to sell the project to Zamin Ferrous in January 2013; however, before the sale could be completed, the port facility experienced a ground failure.

The mine generated underlying profits of US$120m in 2021 and US$54m in 2012.

Subsequent to the sale to Zamin in 2013, approximately 70% of the port was rebuilt, with some iron ore concentrates shipped from late 2013 and early 2014 using an interim barging solution. The Amapá project borrowed US$125m in senior debt from a syndicate of banks to complete this. This debt is secured on the project, and the negotiation of a method of settlement has been a key part of Cadence Minerals’ focus with the project (and a precondition of some of its equity purchase stakes). The treatment of this debt is described more fully below and is included in our valuation.

Valuation

An appropriate valuation of Cadence’s stake in the Amapá project is core to our valuation of Cadence overall. We value have modelled Amapá and come to the following conclusions:

Our unrisked valuation of the Amapá project using an NPV methodology and a 10% discount rate is US$978m (100% basis). This is broadly similar to Cadence’s PFS valuation of US$949m (100% basis, 10% discount rate), with the difference due to minor modelling differences and some slightly different` assumptions, discussed below. These differences include an assumed reduction in port capital spending of US$28m, which has been confirmed after the publication of the PFS and should raise the NPV by around that amount (it would be early capital spending in the project).

Our risked (for stage of development) valuation of the Amapá project (100% basis) is US$154m. This is an 84.2% discount to our unrisked NPV valuation of the project. Edison has published a number of studies examining the discount applied to projects for the state of development. In our report Gold stars and black holes , we calculated the average EV/NPV for stage of development for a broad sample of mineral projects at 9.9% for PFS stage projects (the corollary of an 90.1% discount) and 30.9% (equivalent to a 69% discount) for BFS stage – please refer to Exhibit 194: Company EV as percent of attributable project NPV (%), by study type, ordinarily valued companies, excluding statistical outliers, on page 99. These were applicable to a broad range of political risk. We have re-run relative political risk for Brazil according to the latest Fraser Institute risk rankings, and the relative discount for stage of development in Brazil is 15.8% EV/NPV (an 84.2% discount) and 45% EV/NPV ratio for BFS (a 55% discount).

As an indication of this discount expressed in terms of discount rates, we would need to raise our discount rate to 29.1% to achieve a similarly discounted value of US$157m.

There is clear incentive to progress Amapá towards BFS status. We understand (given that the orebody is well understood) that this will require licensing and plan optimisation studies. Progressing to this stage would reduce the discount we apply from 84.2% to 55.0% (and its discounted value would rise by US$289m from US$154m to US$440m) and cost in the order of US$5–7m.

Cadence has said it could seek a joint venture (JV) partner at the project level to advance the project. It has recently secured mezzanine finance that will continue the development of the project, including optimisation studies on the processing route and environmental licencing (see the Financials section below for details).

Exhibit 5: Amapá – key 2022 PFS assumptions and Edison assumptions

Unit

2022 PFS data

Edison assumption*

Life of mine

Years

16

Iron ore feed

Mt (Dry)

177

Fe grade of ore

%

39.3

Recovery

%

76.3

Production

62% Fe iron ore concentrate

Mtpa

0.89

65.4% Fe iron ore concentrate

Mtpa

4.23

Total production

Mtpa

5.12

Operating costs

C1 Cash Cost

US$/DMT

35.53

Logistics and transport

US$/DMT

28.7

Cash cost CFR

US$/DMT

64.23

Capex

Pre-production capital investment

US$m

399

371

Sustaining capital over life of mine

US$m

245

Price assumptions

62% iron ore concentrate

US$/t

95.0

100

65.4% iron ore concentrate premium

US$/t

24.0

18.5

65.4% iron ore concentrate price

US$/t

119.0

118.50

Source: Cadence 2022 PFS, Edison Investment Research. Note: *Edison assumptions listed. If not listed, PFS assumptions have been used.

Key differences between Cadence PFS and Edison valuation

We use a long run iron ore price of US$100/t (for 62% Fe product) and a 65.4% concentrate premium of US$18.5/t (see the appendix for this derivation). This results in a similar combined price for 65.4% Fe concentrate (Edison at US$118.5/t vs Amapá PFS at a long-run iron ore price of US$95/t plus a product premium of US$24/t for a total price for US$119/t). It does, however, result in a US$5/t higher assumed price for the 62% iron ore concentrate and slightly higher revenue overall.

We have included a reduction in port capital spending of US$28m as has been announced by Cadence after the publication of the original PFS study.

Our modelling assumptions may have minor differences in approach to the PFS study.

Exhibit 6: Illustrative steady state Amapá annual cash generation

 

Unit

Measure/year

Production

 

 

62% product

Mt

0.9

65% Product

Mt

4.2

Total Production

Mt

5.1

Iron Ore Price

 

 

62% benchmark

US$/t

100

Premium

US$/t

19

Total Price

US$/t

119

Revenue

US$m

590

Costs

 

 

C1 Cash

US$/t

35.5

Freight

US$/t

28.7

CFR

US$/t

64.2

Delivered Cost M

US$m

312

Royalties & Liabilities

US$m

24

EBITDA

US$m

254

Depreciation

US$m

17

EBIT

US$m

237

Tax Rate

%

15%

Less: Tax

US$m

(36)

Earnings before interest after tax

US$m

201

add: D&A

US$m

17

less: capex

US$m

(15)

Cash flow

US$m

203

Source: Edison Investment Research

Ownership structure and options

The Amapá mine is owned by DEV Mineração (DEV), which is owned 100% by the JV entity Pedra Branca Alliance. This JV is owned 30% by Cadence Minerals and 70% by Indo Sino, a Singapore based commodity trader. Indo Sino entered into its ownership through the acquisition and conversion of debt from Zamin, and we understand it sees Cadence as the right partner to focus on de-risking the asset through advancing the approvals and licensing process.

Cadence’s entry into the Amapá project has involved a somewhat complex and protracted process of purchasing a stake at the same time as brining Amapá out of administration. This has involved increasing its stake alongside satisfying creditors of DEV by shipping iron ore out of existing stockpiles, while also progressing plans to restart the shut mine.

Key points in this ownership structure are:

Cadence has the first right of refusal to increase its state to 49% of the JV should Indo Sino seek further investors or an investment in the JV. We understand that each additional 1% stake would be bought at recent rates (ie approximately US$1m/1%).

If Cadence does not exercise its first right of refusal, Indo Sino has a 12-month option to buy the shares held by Cadence for 1.5x the price paid by Cadence for these shares. This buyback would be valued at US$13.8m.

In February 2022 the first 20% of investment was completed for a consideration of US$2.5m, implying a project valuation of US$12.5m. An additional 7% vested in March 2022 for a consideration of US$3.5m, implying a project valuation of US$50m. In October 2022, Cadence added another 3% to take its stake to 30% through the conversion of loans, and the capitalisation of management, consultancy, administration and cash investments. The value of these were put at US$3.3m, implying a total project value of US$110m. The total 30% cost Cadence US$9.3m, with a total average implied value of US$31m, although the rise in implied value over the transactions reflects continued de-risking, and the most recent implied valuation of US$110m is still below our risk-adjusted project valuation of US$154m.

In its recent announcement of a mezzanine debt facility, Cadence indicated it was increasing its interest in Amapá to 33%. We have not included this (as it is dependent on further spending), but given the recent increases are in the order of US$1m/1% stake, continued creep of the ownership stake is value accretive in our view.

Outstanding liability settlement

In early September 2020 DEV and its owners agreed in principle to settle outstanding claims by secured bank creditors. This was a pre-condition to Cadence vesting its initial 20% investment in Amapá. DEV was allowed to ship sufficient iron ore from stockpiles to realise a US$10m profit (after deduction of all shipping, regulatory and sales costs). This was to satisfy approximately US$2.5m small and employee creditors and allow for approximately US$6m recommissioning studies on the Amapá producer and the restart of maintenance and monitoring of the current tailings dam facilities. Any balance could be used for working capital and a payment against outstanding amounts due to bank creditors.

On 29 December 2021 Cadence announced a binding settlement agreement had been reached with the secured bank creditors of DEV. This agreement included the reduction in the total principal owed to the secured bank creditors with the repayment of some this balance coming from the cash flow from the ongoing sale of DEV’s iron ore stockpiles, with the remaining to be paid by DEV prior to project financing. Unsecured creditors will be paid from DEV cash flow over a period of nine years (year seven to year 17 of operations).

The liabilities for this debt payment are included in our NPV analysis (as it is in Cadences published NPV). Cadence can also utilise the shipping of existing historical iron ore stockpiles to reduce this liability. In April 2022, Cadence reported it held approximately 1.24m tonnes of 58% product at its port at Santana and we understand the stockpile is still largely there (1.18Mt). On a gross basis at long-run prices (US$85/t for 58% product, which typically trades at a 15% discount to benchmark prices), this could be worth approximately US$100m in revenue, but taking into account shipping costs, a net realisable value is likely to be much lower (possibly in the region of US$30m at typical transport and ocean freight rates). In our view Cadence (or ultimately the secured creditors where the commercial decision on the timing of shipments lies) is likely to be opportunistic and sell this stockpile during periods of high prices. To be conservative, we have not included the realisable value of this stockpile (which is owned by secured creditors) in our valuation.

Sonora

We value Cadence’s interest in the Sonora lithium project in Mexico at US$9m. This valuation is based on the takeout valuation share of the mine tonnes feeding the Sonora project based on Ganfeng’s purchase of the project’s owner Bacanora Lithium in May 2021 (see exhibit below), with the following adjustments:

We have removed the control premium paid to the undisturbed valuation of Bacanora by Ganfeng. Ganfeng made an offer for full control (from its existing 28.9% stake) in May 2021, paying an effective 63% control premium. Adjusting for this premium, the valuation of Bacanora was US$240m. Bacanora at the time of takeout owned 50% of Sonora at the project level, so the implied undisturbed valuation of Bacanora’s interest in Sonora was US$480m.

Cadence owns a 30% stake in the tenements that represent 12% of the overall ore feed for the operation planned by Bacanora in its BFS study (so an effective share of the mine plan of 3.6%). This is conservative in our view and much less than Cadence’s wider share of lithium resources for the wider Sonora project (18.6%; see Exhibit 10).

Adjusting for takeout premium, the implied valuation of Cadence’s tenements is US$17.9m. In our base case valuation, we have applied a 50% discount to this to reflect political uncertainty and potential delays in Mexico, which we believe to be a conservative approach. As discussed below, Mexico has introduced a range of regulatory changes concerning its lithium resources; however, we do not believe these apply to licensed operations such as Sonora.

As a high-case valuation, we think it is reasonable to remove the political discount and reinstate the market movement since the Bacanora transaction (when lithium carbonate was trading at approximately US$14,000/t). The catalyst for realising this higher valuation would be Ganfeng proceeding with the construction of the mine.

Exhibit 7: Valuation scenarios – Cadence’s stake in Sonora

Base case

High case

Ganfeng takeout valuation of Bacanora (May 2021, US$m)

391

391

Premium paid to undisturbed market value

63%

63%

Undisturbed market value (US$m)

240

240

Valuation of Sonora (Bacanora 50%)

480

480

Market movement of lithium developers*

63%

Adjusted undisturbed market value (US$m)

782

Bacanora share of mine feed**

96.4%

96.4%

Value of Sonora (US$m)

498

812

Cadence share of mine feed

3.6%

3.6%

Implied value of Cadence Stake (US$m)

17.9

29.2

Risk discount

50%

0%

Value (US$m)

9.0

29.2

Value (p/share)

4.1

13.3

Source: Edison Investment Research. Note: *Average market movement (market cap weighted) of Lithium Americas, Allkem, Vulcan, Piedmont, Lake Resources, Ioneer, Neo Lithium and Lepidico since Bacanora transaction. **Share of Sonora mine plane feed tonnes by source.

Share of mine feed attribution

Cadence has an interest in the Sonora lithium project in Mexico, through the part ownership in some of the mining tenements. The Sonora project includes 10 concessions covering nearly 100,000 hectares. Key properties include:

Minera Sonora Borax, which is a wholly owned subsidiary of Ganfeng Lithium (Cadence ownership: 0%)

La Ventana and La Ventana 1 concessions

Mexalit, which is owned 70% by Ganfeng and 30% by Cadence

El Sauz, El Sauz 1, El Sauz 2, Fleur and Fleur 1 concessions

Buenavista, and San Gabriel concessions

Megalit, which is owned 70% by Ganfeng and 30% by Cadence

Megalit, Buenavista, and San Gabriel concessions

Mexalit forms part of the Sonora project and according to the last published feasibility study (January 2018) will be mined in years 9 to 19 of the mine plan (the Megalit concessions do not form part of the mine plan). Cadence Minerals’ overall share of ore feed to the plant is 12% over the life of mine and peaks at 44% in year 12 of the mine plan.

The mine plan included in the 2018 feasibility study may no longer be relevant. Ganfeng may choose to mine a different section of ore, or potentially mine at a different rate to the 2018 plan. As Exhibit 9 shows, the mineral licences in which Cadence owns an interest surround the core licences for the mine plan.

In April 2022, the Mexican state approved a bill to nationalise lithium reserves, providing for a state-run enterprise to have exclusive rights over lithium mining and requiring the issue of new permits for lithium exploitation by private firms. The government did exclude firms that had active mining permits (which we understand includes Sonora), and in February 2023 the government passed a presidential decree confirming that within a 900 square-mile lithium mining zone in northern Sonora state, existing concessions would ‘remain safe’.

In our view, the Sonora project will be needed to supply the growing deficit in the lithium market that looks very likely in the late 2020s. The project is now less visible as it no longer sits within a dedicated public company pushing ahead with its development, but when construction commences, the perceived risk of the project is likely to fade quite quickly.

Exhibit 8: Sonora lithium project – mine plan sourcing of ore by lease holders by year

Source: Bacanora PFS for Sonora project

Exhibit 9: Sonora project – map of key permits

Source: Cadence Minerals

Exhibit 10: Sonora mineral reserves and Cadence share

Category

Ore (Mt)

Li (ppm)

LCE (000t)

LCE (000t attributable)

Cadence share

Mineral reserves (1,500ppm Li cut-off)

Proven

80.1

3,905

1,666

116

Probable

163.7

3,271

2,849

723

Total

243.8

3,480

4,515

839

18.6%

Measure and indicated resources (1,000ppm Li cut-off)

Measured

103.0

3,480

1,910

134

Indicated

188.0

3,120

3,130

785

Total

291.0

3,250

5,038

919

18.2%

Inferred mineral resources (1,000ppm Li cut-off)

Inferred

268

2,650

3,779

559

14.8%

Source: Cadence Minerals

Valuation

We value Cadence using a SOTP methodology based on the value of its investment portfolio. We use current market valuations for its listed equity investments, a risk-adjusted (for stage of development) share of NPV for Amapá and a takeout multiple for its stake in Sonora. As summarised in Exhibit 1, this results in a valuation of £55.7m or 32.2p/share.

If we removed the PFS to BFS stage discount for Amapá (84.2% to 55%) and adopt a higher scenario valuation for Sonora (accounting for lithium developer appreciation and removing political risks) our valuation would rise to £98.7m or 57.1p/share.

Exhibit 11: Cadence Minerals, high-case valuation

Value
(£m)

Cadence share (p/share)

Total of major listed investments

10.2

5.9

If Amapá BFS is completed

NPV value ($m)

Discount

Risk adjusted ($m)

Risk adjusted (£m)

Cadence stake

Amapa PFS NPV10 (Edison)

978

55%

440

233

33%

77.0

44.6

Cadence share of cost of BFS (assuming $8m)

(1.8)

Amapa high case valuation

75.1

43.5

Sonora valuation high case

13.3

7.7

Value of listed and unlisted investments (high case)

98.7

57.1

Source: Edison Investment Research

Financials

Cadence is an investment company and its financial accounts represent its ongoing funding needs for general and administrative expenses (G&A) as well as investment spending for advancement of its portfolio of mining assets. Its current strategy is to bring in a partner at the JV level to continue the advancement of Amapá, naturally depending on price and timing. In the interim, and to minimise equity dilution through share issuances or the sell down of some of its listed equity holdings in a period of cyclically weak prices, Cadence has chosen to use a mezzanine debt arrangement as a bridge towards realising value at Amapá.

Mezzanine debt facility

On 26 May Cadence entered into a mezzanine debt facility to fund the continued development of the Amapá iron ore project. Key aspects of this facility include:

A facility of initially US$2m (and up to a further US$8m over the next three years) with investors RiverFort Global Opportunities and YA II PN. The funds are to be used to continue development of the Amapá iron ore project, including licensing and processing optimisation studies.

In its project update Cadence advised that continued investment will increase its stake in Amapá from 30% to 33%.

The first tranche of the loan facility is for two years with a 9.5% annual interest rate and a six-month principal holiday.

The principal and interest payments are payable in cash; however, Cadence can elect not to pay the principal and interest amounts, giving the investors the right to convert these into shares:

at 12.7p (a 30% premium to Cadence’s closing price on 25 May), or

at a 7% discount to the average five-day volume weighted average price (VWAP) chosen by the investors in the 20 trading days preceding its conversion notice, or

at the price the company issues further equity if lower than the existing conversion price.

As security for these loans Cadence has allowed the placement of a holding charge over its holdings in European Metals Holdings (placing these into escrow) as well as the issue of new shares to investors. As part of the loan facility, Cadence agreed to grant 8,251,224 warrants to subscribe for ordinary shares in the company at an exercise price of 13.2p (representing roughly a 35% premium to the share price) with a 48-month term.

Cadence’s strategy has been to bring in a JV partner at the asset level to assist with funding the full DFS and we see the mezzanine debt facility as a bridge towards this longer-term aim. Cadence’s other option to continue to fund the DFS progression could be to either sell stakes in its listed assets or issue its own equity, but we would highlight that its listed assets look cyclically weak at present and its own equity is not reflecting its underlying assets. In our view, therefore, this mezzanine debt facility looks like a sensible strategy.

Exhibit 12: Financial summary

£000

2020

2021

2022

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Income

 

 

10,371

1,170

(4,041)

0

Share-based payments

(57.0)

(197.0)

(13.0)

0.0

Admin

(1,379.0)

(1,604.0)

(1,443.0)

(1,800.0)

Operating profit

 

 

8,935.0

(631.0)

(5,497.0)

(1,800.0)

EBITDA

 

 

8,935.0

(631.0)

(5,497.0)

(1,800.0)

Net Interest and finance expense

(292.0)

32.0

(3.0)

0.0

Forex

(820.0)

455.0

3.0

0.0

Profit Before Tax

 

 

7,823.0

(144.0)

(5,497.0)

(1,800.0)

Reported tax

0.0

0.0

0.0

0.0

Profit After Tax (reported)

7,823.0

(144.0)

(5,497.0)

(1,800.0)

Average Number of Shares Outstanding (m)

113.4

141.5

163.8

163.8

EPS - basic reported (p)

 

 

6.90

(0.10)

(3.36)

(1.10)

BALANCE SHEET

Fixed Assets

 

 

2,885.0

5,660.0

11,365.0

13,365.0

Financial assets

2,885.0

5,660.0

11,365.0

13,365.0

Current Assets

 

 

19,722.0

17,346.0

10,273.0

6,473.0

Receivables

5,365.0

5,048.0

3,957.0

3,957.0

Cash

596.0

324.0

110.0

310.0

Financial assets

13,761.0

11,974.0

6,206.0

2,206.0

Current Liabilities

 

 

(514.0)

(853.0)

(317.0)

(317.0)

Payables

(295.0)

(853.0)

(317.0)

(317.0)

Borrowings

(219.0)

0.0

0.0

0.0

Long Term Liabilities

 

 

0.0

0.0

0.0

0.0

Net Assets

 

 

22,093.0

22,153.0

21,321.0

19,521.0

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

22,093.0

22,153.0

21,321.0

19,521.0

CASH FLOW

Operating profit

8,935.0

(631.0)

(5,497.0)

(1,800.0)

Adjustments

(10,296.0)

(120.0)

3,542.0

0.0

Net operating cash flow

 

 

(1,361.0)

(751.0)

(1,955.0)

(1,800.0)

Payments for non-current financial investments

(645.0)

(2,775.0)

(4,600.0)

(2,000.0)

Payments for current financial investments

(50.0)

(830.0)

(235.0)

0.0

Sale of current investments

2,052.0

3,787.0

1,926.0

4,000.0

Share issue

2,723.0

57.0

5,016.0

0.0

Other

(2,603.0)

(225.0)

(379.0)

0.0

Net Cash Flow

116.0

(737.0)

(227.0)

200.0

Opening net (debt)/cash

 

 

481.0

596.0

324.0

110.0

FX and other

(1.0)

465.0

13.0

0.0

Closing net (debt)/cash

 

 

596.0

324.0

110.0

310.0

Source: Cadence accounts, Edison Investment Research

Contact details

Revenue by geography

c/o The Broadgate Tower
20 Primrose Street
London EC2A 2EW
United Kingdom
+44 (0)20 3582 6636
www.cadenceminerals.com

N/A

Contact details

c/o The Broadgate Tower
20 Primrose Street
London EC2A 2EW
United Kingdom
+44 (0)20 3582 6636
www.cadenceminerals.com

Revenue by geography

N/A

Management team

Non-Executive Chairman: Andrew Suckling

Director & Chief Executive Officer: Kiran Morzaria

Andrew has over 25 years’ experience in the commodity industry. He began in 1994 as a trader on the London Metal Exchange, and subsequently became a founding partner, research analyst and trader with the multibillion fund management group Ospraie. Andrew is a graduate of Brasenose College, Oxford University earning a BA (Hons) in modern history in 1993 and an MA in modern history in 2000.

Kiran holds a BEng from the Camborne School of Mines and an MBA (finance). He has over 20 years’ experience in the mineral resource industry working in both operational and management roles. The first four years of his career were spent in exploration, mining and civil engineering, after which he was involved in the acquisition, recommissioning and eventual sale of the Vatukoula Gold Mine. Kiran was appointed a director of Cadence in 2015, is a non-executive director of European Metals Holdings and a non-executive director of UK Oil & Gas.

Finance Director & Company Secretary: Donald Strang

Non-Executive Director: Adrian Fairbourn

Donald is a member of the Australian Institute of Chartered Accountants and has been in business over 20 years, holding senior financial and management positions in both publicly listed and private enterprises in Australia, Europe and Africa. He has considerable corporate and international expertise, and over the past decade has focused on mining and exploration activities. He is an executive director of Gunsynd.

Adrian began his career as an investment analyst before moving to build and manage the highly successful alternative fund-of-funds operation at the Bank of Bermuda. Adrian has co-managed a multi-family office in London, responsible for hedge fund investments, direct investments and also asset-raising for co-investment opportunities. He has successfully assisted in over US$1bn of structuring, capital and fund-raising projects for private companies and alternative funds.

Management team

Non-Executive Chairman: Andrew Suckling

Andrew has over 25 years’ experience in the commodity industry. He began in 1994 as a trader on the London Metal Exchange, and subsequently became a founding partner, research analyst and trader with the multibillion fund management group Ospraie. Andrew is a graduate of Brasenose College, Oxford University earning a BA (Hons) in modern history in 1993 and an MA in modern history in 2000.

Director & Chief Executive Officer: Kiran Morzaria

Kiran holds a BEng from the Camborne School of Mines and an MBA (finance). He has over 20 years’ experience in the mineral resource industry working in both operational and management roles. The first four years of his career were spent in exploration, mining and civil engineering, after which he was involved in the acquisition, recommissioning and eventual sale of the Vatukoula Gold Mine. Kiran was appointed a director of Cadence in 2015, is a non-executive director of European Metals Holdings and a non-executive director of UK Oil & Gas.

Finance Director & Company Secretary: Donald Strang

Donald is a member of the Australian Institute of Chartered Accountants and has been in business over 20 years, holding senior financial and management positions in both publicly listed and private enterprises in Australia, Europe and Africa. He has considerable corporate and international expertise, and over the past decade has focused on mining and exploration activities. He is an executive director of Gunsynd.

Non-Executive Director: Adrian Fairbourn

Adrian began his career as an investment analyst before moving to build and manage the highly successful alternative fund-of-funds operation at the Bank of Bermuda. Adrian has co-managed a multi-family office in London, responsible for hedge fund investments, direct investments and also asset-raising for co-investment opportunities. He has successfully assisted in over US$1bn of structuring, capital and fund-raising projects for private companies and alternative funds.

Principal shareholders

(%)

Hargreaves Lansdown (Nominees)

12.44

Interactive Investor Services Nominees

8.67

Barclays Direct Investing Nominees

7.99

Hargreaves Lansdown (Nominees)

7.27

Interactive Investor Services Nominees

6.53

HSDL Nominees

5.63

Hargreaves Lansdown (Nominees)

5.38


Appendix 1: Amapá project details

Geography

The Amapá project is a mining venture in the Amapá State located in north-east Brazil, encompassing an open-pit iron ore mine, processing and beneficiation plant, railway line and export port terminal. The mining site is situated around 125km north-west of the municipalities of Macapá and Santana. Previously, processing and beneficiation were conducted on-site, and the final products were conveyed through a regulated railway line to Amapá’s integrated export port terminal located at Santana.

Amapá State is mostly covered with rainforest, while the remaining areas are covered with savannah and plains with a typically tropical climate. Geographically, Amapá bounds French Guiana to the north, the Atlantic Ocean to the east, Pará to the south and west, and Suriname to the north-west.

Exhibit 13: The Amapá project location

Source: Cadence PFS

Infrastructure

Located at a complex near the towns of Pedra Branca do Amapári and Serra do Navio, north-west from the municipalities of Macapá and Santana, the Amapá mine complex consists of various open pits. Previously, iron ore processing and beneficiation occurred on-site, with final products being transported along a dedicated and controlled railway line to Amapá’s integrated export port terminal at Santana. At the time of production, the mine benefited from well-developed power and water infrastructure as well as tailings waste management. Following its closure, the process plant, rail and port suffered oxidization, vandalism, theft and damage. Investigations are ongoing to identify the extent of rehabilitation required to bring the site back online. These primarily include:

Permanent buildings – these include all typical infrastructure required to run a functioning mine site (excluding the mine itself), such as: geological shed, laboratory, training centre, first aid centre etc.

Access and site roads – the site is accessed from the federal highway BR 210, then a two-way access route (12.4m in length), which can be used to transport concentrate to the rail load out station. Once operational, DEV plans to construct an overland conveyor belt to replace the truck haulage (other options are being discussed). On site, traffic uses secondary roads connecting various infrastructure.

Rail works – the rail loading facility consists of a product storage and loading yard for concentrate, 12.4km west from the plant and 184km from the port. Prior to cessation of operations, a capacity of 6.5Mtpa (wet) was reached in 2012. Anglo had committed to a rail revitalisation and improvement programme with 61.5km completed by early 2013. Prior to reopening, the refurbished section will require the removal of vegetation and some minor refurbishment with the remainder requiring a full revitalisation.

Santana port – located on the northern bank of the Santana Channel of the Amazon River, the process flow for the port consists of a discharge point for bottom dump rail wagons, which places iron ore product onto the conveyor system before being distributed into stockpiles by belt conveyors and stackers or directly fed onto an export vessel. The port has a single berth with a maximum capacity to accommodate a Capesize vessel. The port has been partially rebuilt following the geotechnical failure in 2013, and assessment is being undertaken to identify the scope of work still required to bring the port to operation.

Power supply – the planned mine requires an increased power supply, and therefore the current infrastructure needs upgrading. Along with a connection to the main grid, there will also be provision for installation of standby generators.

Exhibit 14: Amapá mine site and processing plant

Source: Cadence Minerals

Geology

Regional geology

The Amapá project is located in the north-east section of the Amazon Craton, Guiana Shield, within the Maroni-Itacaiúnas province. It is comprised of Paleoproterozoic greenstone belts, containing banded iron formations (on the Vila Nova Trend), underlain by Archean basement rocks, and overlain by Tertiary lateritic deposits and Quaternary alluvial materials.

The iron-bearing Vila Nova Trend is composed of volcano-sedimentary rocks metamorphosed in green schist to amphibolite grades comprising the greenstone belt terrain. The main lithologies that compose this group are mafic and acid rocks on the base and oxide/silicate facies banded iron formations, quartzite, conglomerate, greywacke, marble and schists. They occur morphologically as elongated hills with north-west to south-east and west-north-west to east-south-east directions. These units have undergone brittle-ductile deformation in the form of north-west shear zones. Underlain by Archean basement rocks consisting of granulites, gneisses and migmatites derived from Archean igneous protholiths, both groups are intruded by a series of granites, correlated pegmatites and metabasic dykes. Tertiary lateritic deposits and Quaternary alluvial materials overlay these units.

Local geology

Iron mineralisation in the Amapá state is hosted within the Vila Nova Group. This is sequence of metamorphosed volcanic and sedimentary rock where iron mineralisation occurs as a banded iron formation (BIF), metamorphosed to amphibolite grade. The Amapá System area exhibits diverse iron mineralisation types, including itabirites, powdery haematites, colluvium and canga. Typically formed in ridges with a NW-SE strike, the BIFs are bounded by a lower unit of para-amphibolite and an upper unit of quartz mica schist. At the Amapá project, these metasediments are seen to have been subjected to several episodes of folding and shearing. The prominent iron-rich structure is located within a 14km-long synform known as the Boomerang Structure (owing to its shape, Exhibit 15), divided into northern and southern domains. Totalling 8km in length, the northern domain is orientated North-South due to the combination of a folding patterns and a North-South shear zone compared to the 6km southern domain, which naturally trends NW-SE. Pegmatite intrusions crosscut the itabirites. This intrusive event has formed hematite bodies and the boundaries of pegmatite and country rock. These intrusions (with associated intense hydrothermal alteration) are understood to have introduced elevated levels of common iron ore contaminants to the system. Additionally, gold mineralisation is reported to occur along the western boundary of the Vila Nova Group, most notably within the Taperebá West prospects.

Exhibit 15: The Amapá project geological setting

Source: Cadence PFS

Reserves and resources

Mineral resource

The mineral resource and ore reserve statements have been prepared and presented in accordance with the guidelines of the Australasian Code for Reporting of Exploration Results, Mineral Resources, and Ore Reserves (the JORC Code), 2012 Edition.

The Amapá project has undergone several periods of exploration, and subsequent mining from 2007 to 2014. The geological factors influencing mineralisation are well understood and supported by drilling and sampling procedures following modern industry standards. The completed work is adequate to define the boundaries and features of the mineral deposit, with the associated data confirming its accuracy and sufficiency for estimating and disclosing a mineral resource.

The Amapá project has been extensively drilled from a spacing of 200m x 100m down to 50m x 50m for the geological modelling and resources update completed in 2012 by Anglo American. As of June 2012, 1,064 diamond drill holes accounted for 77,845.15m. Prominas Mining was commissioned and produced a new mineral resource estimate (MRE) in 2022 in accordance with the guidelines of the JORC Code (2012). Mineral resource classification included a review of assay data quality, the geological interpretation, geological continuity, grade continuity, drill spacing, model validation and reconciliation against production using the drill hole database and study of the old sections provided by DEV. The study involved the preparation of a 3D geological model using the aforementioned data to outline the updated limits of the resources.

This research resulted in the Amapá project having a total mineral resource (reported as wet tonnes), prepared in accordance with the guidelines of the JORC Code (2012), of c 276.24Mt at 38.33% Fe (229.5Mt is classified as measured and indicated mineral resources, Exhibit 16). Mineral resources were further limited based on an expectation of eventual economic extraction to an optimised open pit shell generated using appropriate economic and technical parameters.

Exhibit 16: Comparison of current and previous resource estimates for the Amapá project

Classification

Tonnage (Mt)

Fe (%)

SiO2 (%)

Ai2O3 (%)

P (%)

Mn (%)

Current MRE 31 August 2022

Measured

55.33

39.26

30.40

6.54

0.161

1.03

Indicated

174.15

38.60

28.75

7.86

0.156

0.91

M+I

229.48

38.76

29.15

7.54

0.157

0.94

Inferred

46.76

36.20

27.62

10.49

0.139

0.86

Total

276.24

38.33

28.89

8.04

0.154

0.93

Previous MRE 2 November 2020

Measured

0

0

0

0

0

0

Indicated

176.70

35.32

30.00

6.20

0.17

1.20

M+I

176.70

35.32

30.00

6.20

0.17

1.20

Inferred

8.70

36.30

27.90

7.40

0.44

1.63

Total

185.40

35.57

29.90

6.30

0.18

1.22

Source: Cadence PFS. Note: All tonnages are reported wet tonnes.

The following insights are useful when comparing the 2022 and 2020 resources estimates:

1.

The 2022 mineral resources are reported within an optimised open pit shell using a product price of US$120/t, within the mining licence boundary and at a cut-off grade of 25% Fe. Mineral resources are reported for both friable and semi-compact mineralisation.

2.

The 2020 mineral resources have been restricted to friable haematite, friable itabirite and friable altered itabirite material falling within an optimised pit shell and using a product price of US$130/t. A cut-off grade of 25% Fe has been used for reporting material within an optimised pit shell.

3.

The key difference between the 2020 and 2022 MREs can be attributed to the updated parameters used in the 2022 resource estimate, the inclusion of additional material types (colluvium and canga) and completed additional data validation that was omitted from the 2020 resource estimate.

Ore reserve estimate

In conjunction with the mineral resource estimate, Prominas also prepared an ore reserve estimate in accordance with the guidelines of the JORC Code (2012). Indicated and measured mineral resources have been modified to estimate proven and probable resources, respectively, with inferred resources set to waste. Ore reserves are affected by the following factors: metal prices, changes in interpretations of mineralisation geometry and continuity of mineralisation zones, geotechnical and hydrogeological assumptions, the ability of the mining operation to meet the annual production rate, operating cost assumptions, mining and process plant recoveries, the ability to meet and maintain permitting and environmental licence conditions, and the ability to maintain the social licence to operate. Taking these variables into account, an ore reserve of 195.8Mt at 39.34% Fe reported to a cut-off grade of 25% Fe has been declared.

Exhibit 17: Ore reserves for the Amapá project

Classification

Tonnage (Mt)

Fe (%)

SiO2 (%)

Ai2O3 (%)

P (%)

Mn (%)

Proven

50.7

39.58

29.88

6.56

0.162

1.05

Probable

145.1

39.26

27.53

7.98

0.159

0.89

Total

195.8

39.34

28.14

7.61

0.160

0.93

Source: Cadence PFS. Note: All tonnages are reported wet tonnes.

Potential for further resource estimates

DEV has some operational agreements with the neighbouring gold mine owner, Great Panther, located in Pedra Branca do Amapari, Amapá. This allows DEV the opportunity to evaluate and ask for exploration and mining permits for all the iron ore minerals that exist within the Great Panther permits or tenements. These include exploration agreements, joint operation agreements and iron ore concentrate supply agreements.

Mining and processing

As previous mining suggests, the continuity and geometry of the orebodies is amenable to bulk open pit mining with low dilution and ore loss, and a low strip ratio (0.41:1 waste to ore ratio). In line with the resource estimates outlined by Prominas, Cadence has undertaken a mine design associated studies to the accuracy and level required for PFS, confirming that design, fleet requirements and production rates are in line with industry standards. Capital and operating costs are considered suitable for a project of this scope given climatic and local conditions regarding all aspects of the mine design and scheduling. The planned mine layout and mine operations are typical of other open pit iron ore operations of a similar scale.

The proposed conventional open pit mining method will span a 16-year life of mine, involving drilling, blasting, loading and hauling ore and waste. Operations (including production fleet) will be conducted via a specialist mining contractor on a continuous basis at a planned ore production rate of 12.6Mtpa with an average total mining rate kept below 19.0Mtpa. Prominas estimates mine operating costs of US$15.40/t of product produced (wet) and US$17.05/t on a dry basis.

Mine operation specifics are as follows:

Operations will be conducted based on 365 operating days per year with three eight-hour shifts per day.

Bench heights of 8m will be used for mining ore and waste.

Grade control drilling will be used to delineate the ore zones for excavation as well as low-grade material and waste.

Drilling and blasting of ore and waste rock will be required, while overburden materials will be free digging.

Ore and waste will be loaded into 100t capacity off-highway haul trucks to the stockpiles or to designated waste dumps or used for construction of the tailing storage facility and other infrastructure requirements.

Capital costs

Overall capital costs required for the Amapá project are estimated at US$ 669.1m (according to the 2022 PFS and based on current level of the project, the expected accuracy is ±25%), which include certain engineering, procurement, construction and commissioning, as well as sustaining capital costs and closure and reclamation provisions. Initial capex totals are US$424.7m, with US$25.6 available in recoverable taxes (assumed to be recovered within 48 months), bringing final initial capex costs to US$399.1m. Notable costs include US$155.1m on the beneficiation plant and mining, US$113.9m for the redevelopment of the port and US$28.5m on the rail network. Deferred and sustaining capital costs were estimated at US$244m, including reclamation and closure costs of US$62.8m. As outlined in our valuation, we have included a reduction in port capital spending of US$28m, as announced by Cadence after the publication of the original PFS.


Appendix 2: Key commodity market exposure

This appendix outlines our views on Cadence’s major commodity exposure. Given the relevant importance of Amapá to Cadence, this is largely focused on iron ore but we also summarise our view on lithium and rare earths. For the latter two, additional information can be found in two recent thematic reports, with the key conclusions summarised below.

A thematic report on the lithium sector which looks at the industry supply/demand fundamentals, brine/hard rock project economics as well as the short- and long-term lithium price dynamics.

A thematic report on the wider critical minerals space, including rare earths.

Iron ore market

Iron ore is an internationally traded global commodity with transparent pricing. Prices can be relatively volatile in the short term (driven by economic and industrial stocking cycles), but in the longer run reflect supply/demand dynamics, notably economic growth in developing economies and the production performance of a relatively concentrated group of major suppliers.

Iron ore is used almost exclusively in steelmaking (steel is c 96% iron). Global iron ore production reached c 2.3bn tonnes (Bnt) in 2020, of which 1.5Bnt (or 65%) was traded and shipped intra-regionally, most typically in large bulk shipments commonly referred to as seaborne iron ore. At average annual prices (US$112/t 2022 year to date average for 62% Fe fines), this represents a market size of c US$258bn for the global market and US$168bn for seaborne trade.

While some steel producers have their own integrated sources of iron ore, the global iron and steel industry is largely unintegrated (ie separate ownership of raw materials mining and metal processing). Steelmaking tends to be located close to centres of demand (owing to a wide variety of product types and complex logistics) and widely distributed globally. In contrast, iron ore mining naturally occurs where high-quality orebodies and large logistics systems enable efficient transport and shipping.

Iron ore exists as many underlying mineralisation types, the most common being haematite and magnetite (both of which are iron oxides), with the latter usually lower grade in situ but able to be concentrated and upgraded owing to its magnetic properties. These ores require reduction to metallic iron as part of the steelmaking process, the most common method being through the use of coke as a reductant in a blast furnace. This method of ‘primary’ steelmaking accounted for 71% of steel production (1.95Bnt) in 2021.

The other major method of producing steel is via the electric arc furnace (EAF) route, which accounted for 29% (0.57Bnt) of crude steel production in 2021 (source: World Steel Association). EAFs use steel scrap as a primary raw material. While this production route has grown in mature markets (eg it accounted for 69% of steelmaking in the United States in 2021), its growth in market share in individual markets is constrained by two factors. Firstly, scrap availability is a key limitation. Steel is a relatively highly recycled material in all markets, with global average recycling in the order of 78–80%, more than double the recycling rates of non-ferrous metals. There is relatively little steel that is not already entering existing recycling chains, so improvements in collection and recovery rates are typically slow and limited. Secondly, many steel applications (eg infrastructure and construction) have long life spans (eg more than 40 years) so scrap arisings can sometimes be generated a significant period of time after initial demand. This is one key reason why China’s steelmaking is still heavily dependent on the primary steelmaking/blast furnace route (89% of production in 2021) and so iron ore-based steelmaking will continue to dominate production for some time.

Drivers of demand

Steel is a low-cost, technologically proven material for construction and a key material for economic development. Construction accounts for c 50% of end-uses globally, and steel is a vital material both as a primary construction method (eg steel I- and H-beams) and as a key part of steel-reinforced concrete structures (steel reinforcing bar). Steel intensity in construction increases with the height of buildings, so the development of high-density urbanisation would not have been possible without the use of steel. Consequently, China’s urbanisation has been a key driver of its economic growth over the past 20 years, with the large-scale movement of populations to high-rise residential structures to preserve agricultural land. Other significant end-uses include machinery (20%), transportation (10%) and consumer goods (6%).

Steel demand has accelerated structurally since the emergence of China as a major economy. Global steel demand grew at a compound annual growth rate (CAGR) of 1.9% in the 1970s and just 0.7% in the 1980s, reflecting the de-industrialisation of mature economies. This accelerated to 3.2% in the 1990s, 5.5% in the 2000s and moderated slightly to 3.2% in the 2010s. China accounted for 52% of the global end-use of steel in 2021, with other Asian countries accounting for 9.5%, the United States, Canada and Mexico 7.5% and India 5.8%.

While China’s growth has eased (a CAGR of 8.4% in the 2010s versus 12.1% for the previous decade) and a decline was recorded in 2021 (-5.4% to 950Mt), it is not clear that this signals peak steel demand or an inflection point. Peak Chinese steel demand was expected to be 400–500Mtpa in the late 2000s and has continued to surprise on the upside for the past 15 years. Cumulative Chinese steel demand since 1990 totals 13Bnt, which equates to 9t/capita, still less than the 15–18t/capita of steel in place in mature economies such as the United States and Japan. Also, while some continued maturation of China is to be expected, India (with a similar population of c 1.4 billion people) currently consumes only c 100Mtpa of steel, or c 11% of current Chinese demand. Similarly, India’s cumulative steel demand for the past 30 years represents only 1t/capita, or just 11% of the total for China and 6% of that expected for a developed economy. While India has many specific characteristics that will mean its steel demand may not accelerate in the same manner as China, it nevertheless remains a significant potential future prospect for steel (and hence iron ore) demand over time.

Supply

Consensus has typically been too bearish on iron ore prices for the past decade, partly as a consequence of an overestimation of supply growth and misreading the strategy of major producers. The conventional approach is to consider the high profitability and expansion potential of the major seaborne iron ore producers (which include Vale, Rio Tinto, BHP, Fortescue Metals Group and Anglo American) and allow for significant production growth from this group. However, several factors have led to supply growth being lower than forecast.

Firstly, these major producers have often experienced unexpected disruptions. They have large complex production systems, involving multiple orebodies, rail networks and port operations. Major producers have focused on automation to lower production costs (eg driverless trains and trucks) and have often competed for critical engineering resources (particularly in the Pilbara region of Australia). Also, significant tailings dam failures (BHP/Vale’s Samarco dam failure in 2015 and Vale’s Brumadinho dam failure in January 2019) have led to a significant review of tailings dam methodology by the industry. These factors have contributed to planned production increases underperforming expectations.

Secondly, these producers are fighting grade decline. Their systems are typically focused on shipping direct shipping ore (such as haematite), which is high grade (ie high iron content) in situ and requires little or no upgrading (such as ore washing or minor concentration). Given the rapid growth in demand, higher-grade orebodies have been in decline and producers have begun to blend ores to maintain product quality. This ore blending and sorting has added to complexity and has slowed production growth.

Lastly, these producers have an incentive to delay growth. As large incumbent producers (the five producers mentioned above account for 1.1–1.2Bnt pa of iron ore production at present, equivalent to c 70–80% of the seaborne iron ore market volume), the natural incentive in a large commodity market is to not overproduce or drive spot market prices lower. This has been the explicit policy of producers (Rio Tinto, Vale and Fortescue have all used the term ‘value over volume’ to describe their strategy in recent years) for several years.

These factors led to the sustained participation of a wide variety of smaller iron ore producers in the market, and the price being set at levels that allow for the incentivisation and sustained profitability of producers that have a smaller scale and higher costs.

Pricing and market structure

Until 2010, iron ore prices were largely set through annual contract negotiations between major buyers and sellers. Since then, prices have shifted to more regular and transparent price discovery, with prices for spot transactions being published by a number of service providers and a futures market developed on the Singapore Exchange.

Iron ore is typically quoted and priced on the basis of delivered sales to China (CFR) and priced on the basis of product tonnes (not iron content). Prices for ocean freight (which is also cyclical) need to be deducted before reaching a netback price to the producer. There are separate price quotes depending on the quality of the product, with major indices for 58% and for 62% iron content. The price premium for 62% iron ore has averaged 20% (or US$14/t or US$3.50 per one percentage point Fe unit) over the past decade, well above the 6.9% premium expected for the difference in iron content.

The median price differential between 66% and 62% iron ore fines delivered to China for the past five years has been US$23.98/t, or 21.8% of the average spot price over this five-year period. A product with a 65.4% iron grade is 85% of the rise in iron content between these two grades. While the rise per unit of iron is neither linear nor stable, in our view it is a reasonable approximation to apply this 85% to the average premium (21.8%) of the past five years, which yields a premium of 18.5%. Applied to our long-run price of US$100, this results in an iron ore premium of $20.3/t, which we round to US$20/t.

Exhibit 18: Iron ore spot prices (US$/t CFR China)

Exhibit 19: Premium (62% Fe cf 58% Fe iron ore prices CFR China, %)

Source: Bloomberg

Source: Bloomberg

Exhibit 18: Iron ore spot prices (US$/t CFR China)

Source: Bloomberg

Exhibit 19: Premium (62% Fe cf 58% Fe iron ore prices CFR China, %)

Source: Bloomberg

These indices reflect broad pricing trends, while individual transactions reflect particular producer products and a close evaluation of iron content and other impurities. This ‘value in use’ adjustment can incorporate factors such as alumina and phosphorus content. In general, steelmakers will pay a premium for high iron content and lower impurities, reducing emissions and minimising the need for blending or adjusting other raw material contents.

Exhibit 20: Iron ore prices – annual average CFR China (62% Fe basis)

Source: Bloomberg

Market outlook and price forecasts

Spot iron ore prices (62% Fe basis, delivered CFR China) averaged US$113/t in 2022, down from US$153/t in 2021 (which was helped by a restart of the global economy post COVID-19). The average spot price for the past 10 years has been US$94/t in nominal term and US$104/t in real terms (using a US GDP deflator). Extending these datasets back to 2006 does not significantly change these averages (US$93/t in nominal terms and US$110/t in real terms).

While spot prices are likely to continue to fluctuate with economic cycles, we still see both growth in end-use steel demand globally over the next decade and continued restraint by the major iron ore producers. In our view, this is likely to result in average annual prices similar to historical prices (which have seen both demand and supply growth moderating, with iron ore majors unwilling to push out higher cost producers). As such, a long-run iron ore price of US$100/t (basis 62% Fe fines CFR China) is a reasonable assumption for long-run asset valuation. In addition, we see continued upward pressure on grade premiums.

General disclaimer and copyright

This report has been commissioned by Cadence Minerals and prepared and issued by Edison, in consideration of a fee payable by Cadence Minerals. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

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New Zealand

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United Kingdom

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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General disclaimer and copyright

This report has been commissioned by Cadence Minerals and prepared and issued by Edison, in consideration of a fee payable by Cadence Minerals. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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