Cadence Minerals — Amapá optimisation adds value

Cadence Minerals (AIM: KDNC)

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Research: Metals & Mining

Cadence Minerals — Amapá optimisation adds value

This year will be important for Cadence Minerals’ major asset, the Amapá iron ore project in Brazil. Cadence recently announced the results of an optimisation study that points to the potential to increase production by 4.8% and lower processing plant commissioning costs by 33%. An updated pre-feasibility study (PFS) level NPV will be published in the near future and we explore some of the sensitivities in this report. We have adjusted our valuation to reflect portfolio changes and the rise in Cadence’s stake in Amapá, although we have yet to include the value uplift of the optimisation of Amapá.

Written by

Andrew Keen

MD - Head of Content, Energy & Resources, Industrials

Metals & Mining

Cadence Minerals

Amapá optimisation adds value

Major project update

Metals and mining

4 April 2024

Price

5.4p

Market cap

£11m

US$1.26/£, £0.52/A$

Net cash (£m) at 30 June 2023

0.58

Shares in issue

180.7m

Free float (as at end September 2023)

93.5%

Code

KDNC

Primary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

20.0

(1.8)

(48.6)

Rel (local)

16.4

(4.8)

(50.4)

52-week high/low

10.4p

4.5p

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 33.6% interest in the Amapá iron ore restart project in Brazil.

Analysts

Andrew Keen

+44 (0)20 3077 5700

Harry Kilby

+44 (0)20 3077 5700

Cadence MineralsCadence Minerals is a research client of Edison Investment Research Limited

This year will be important for Cadence Minerals’ major asset, the Amapá iron ore project in Brazil. Cadence recently announced the results of an optimisation study that points to the potential to increase production by 4.8% and lower processing plant commissioning costs by 33%. An updated pre-feasibility study (PFS) level NPV will be published in the near future and we explore some of the sensitivities in this report. We have adjusted our valuation to reflect portfolio changes and the rise in Cadence’s stake in Amapá, although we have yet to include the value uplift of the optimisation of Amapá.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

0.0

7.8

6.9

0.0

N/A

N/A

12/21

0.0

(0.1)

(0.1)

0.0

N/A

N/A

12/22

0.0

(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: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Capex and product optimisation

Cadence’s principal asset is its 33.6% interest in the Amapá iron ore project in Brazil, which is an ex-operating mine at the PFS stage of redevelopment. On 22 March 2024, Cadence announced some of the results of a mine optimisation study, which has resulted in improvements in capital spending at the beneficiation plant (a reduction of US$63.2m, or 33%) and an increase in forecast production levels (of 4.8% to 5.5Mt/y, of which 4.51Mt/y will be 65% Fe product and 0.99Mt/y will be 62% Fe product). Cadence also announced that it is redesigning the mine plan with its partners to reduce mining costs. These factors (lower capex, higher production and mine plan changes) will all feed into a new economic assessment at PFS level.

We have not changed our base-case valuation of Amapá (US$978m, US$154m adjusted for stage of development), but the rise in Cadence’s stake from 32.6% to 33.6% increases our attributable value from US$50.3m to US$52.5m. The reduction in capex at the plant (which would cut overall capex from US$371m to US$307.8m, a 17% reduction) would be largely directly accretive to NPV as the spending is at the start of valuation. The revisions include a bump-up in production at existing grades, but Cadence and its partners are continuing to study a change in the flow sheet to produce a 67% grade product.

Valuation: Still does not make sense

We have reduced our valuation slightly to 27.6p/share from 29.5p/share as a result of changes in equity prices in Cadence’s public portfolio. In addition, we have removed Cadence’s stake in Hastings Technology Metals, which has now been sold. Our valuation of its stake in Amapá is unchanged at 23.9p/share as Cadence’s continued earn-in rate (up from 32.6% to 33.6%) in the project was offset by foreign exchange rate changes. Our valuation remains significantly above the market price (5.1x), with the implied valuation of Cadence’s non-public assets, at just £6.9m, well below where we see fair value.

Investment summary

Cadence’s principal asset is its stake in the Amapá iron ore project in Brazil. It also holds minority stakes in a range of exploration and development assets, principally in energy transition metals such as lithium. We have updated our portfolio valuation of Cadence to reflect is current stakes in public entities, as well as our view of the value of its stake in Amapá.

Our base case valuation of Amapá (US$978m, US$154m adjusted for stage of development) is unchanged, but the rise in Cadence’s stake from 32.6% to 33.6% increases our attributable value from US$50.3m to US$52.5m. In its announcement of 22 March, Cadence stated that it was continuing to invest in the project. According to our previous research, we understand that Cadence is buying into this project at a current rate of c US$1m/1pp (its early purchases were at a far lower rate, but that was when the project had significant additional uncertainty). An additional seven months of spending placed this percentage at 33.6%, as confirmed by Cadence’s announcement at the end of March.

Exhibit 1: Valuation of Cadence Minerals (on a portfolio sum-of-the-parts basis)

Cadence stake

Cadence stake (m shares)

Stock price (A$)

Stock price (£)

Market cap (£m)

Value to Cadence (£m)

Cadence share (p/share)

Major listed investments

European Metals Holdings

5.80%

11.75

0.13

27

1.6

0.9

Hastings Technology Metals

0.00%

0.00

0.61

0.32

41

0.0

0.0

Evergreen Lithium

8.70%

15.76

0.11

0.06

10

0.9

0.5

Miscellaneous

0.1

0.1

Total of major listed investments

2.6

1.5

Cadence Minerals market valuation

9.5

5.5

Implied value of non-listed investments

6.9

4.0

Amapá valuation

NPV
(US$m)

Discount

Risk adjusted (US$m)

Risk adjusted (£m)

Cadence stake

Value to Cadence (£m)

Cadence share (p/share)

Amapá PFS NPV10 (Edison)

978

84.2%

154

123

33.6%

41.2

23.9

Sonora valuation (base case)

3.9

2.3

Value of listed and unlisted investments

47.7

27.6

Source: Edison Investment Research. Note: Prices as 26 March 2024. Exchange rates used: US$1.26/£, £0.52/A$.

Amapá optimisation

On 22 March, Cadence announced some of the results of an optimisation study, which has resulted in potential flow sheet and economic improvement concentrating on the beneficiation plant at its Amapá project. The announcement focused on two potential improvements.

Option A: A reduction in beneficiation plant capex

One option that has come out of the optimisation study is the potential to produce the planned mix/grade of products, but at a lower capital cost. The optimisation study resulted in improvements in capex at the beneficiation plant (a reduction of US$63.2m, or 33%) and an increase in forecast production levels (of 4.8% to 5.5Mt/year, of which 4.51Mt/y will be 65% Fe product and 0.99Mt/y will be 62% Fe product). Cadence also announced that it is redesigning the mine plan with its partners to reduce mining costs. These factors (lower capex, higher production and mine plan changes) will all feed into a new economic assessment at the PFS level.

The study resulted in a forecast increase in production of:

A rise of 4.8% to 5.5Mt/year of iron ore concentrate (up from 5.12Mt/y in the PFS).

4.51Mt/y is 65% Fe grade (up from 4.23Mt/y at 65.4%).

0.99Mt/y is 62% Fe grade (up from 0.89Mt/y at 62%).

If we incorporate only the production change in our NPV calculation of the mine, our base NPV calculation of US$977m rises by 10% to US$1,084m (an increase of US$106m). If we incorporate only the capex change, our base NPV calculation rises by 5.3% to US$1,029m (an increase of US$52m).

Together, these changes have the potential to increase the NPV of Amapá by approximately 15%, although we highlight that this is based on our estimate and a fully revised PFS-level NPV calculation is likely to incorporate a number of other changes that are likely to affect the net change. As a general guide to sensitivities, below we show the variance in NPV for varying levels of upfront capital spending and C1 cash costs FOB.

For now, we are not changing our NPV assumption for Amapá as these other factors need to be taken into account, although the improvement in production and reduction in capex are clear and material improvements in inputs into a revised model.

Exhibit 2: Capex versus operating costs (NPV of Amapá)

Capex (US$m)

-20%

-15%

-10%

-5%

Base

5%

10%

15%

15%

Operating cost (US$/t)

297

315

334

352

371

390

408

427

445

-20%

28.4

1,234

1,218

1,203

1,188

1,173

1,158

1,142

1,127

1,112

-15%

30.2

1,185

1,170

1,155

1,139

1,124

1,109

1,094

1,078

1,063

-10%

32.0

1,136

1,121

1,106

1,091

1,075

1,060

1,045

1,030

1,014

-5%

33.8

1,087

1,072

1,057

1,042

1,027

1,011

996

981

966

Base

35.5

1,039

1,023

1,008

993

978

963

947

932

917

5%

37.3

990

975

959

944

929

914

899

883

868

10%

39.1

941

926

911

895

880

865

850

835

819

15%

40.9

892

877

862

847

831

816

801

786

771

20%

42.6

844

828

813

798

783

768

752

737

722

Base case

Reduced capex scenario

Source: Edison Investment Research

Option B: An improvement in the quality of the product

In its 22 March announcement, Cadence also mentioned that it remained ‘fully committed to advancing the development of a 67% “green iron” Fe product flow sheet at a production rate of 5.5Mtpa’. No further details were included in the release, but we understand that these studies would look at changes to the process flow sheet to achieve a 67% Fe grade. The operation had previously been able to produce 66.5% Fe product by using a reverse flotation cell (ie a flotation cell that floats the low-grade/waste part of the product and results in higher iron product). The plan to take the product to 67% could involve additional grinding and magnetic separation capacity and we understand this could be used for the entire output (at 5.5Mt/year).

The advantage of this option is that the market rewards high-iron concentrate, not only due to the additional iron units per tonne, but also because of the lower amount of impurities and waste. This product could be seen as ‘green iron ore’ and potentially be used as direct feed for direct reduced iron furnaces, which could open up customers in nearer markets (eg shipping ore to the United States rather than to China).

Naturally, a higher-grade product requires more throughput of ore at the start of the process and a higher mining rate, which Cadence will need to take into account in the overall revision of the PFS. More processing/testing of this potential flow sheet change is being examined, including the implications for water usage, tailings management and overall mass recovery. We understand this further work is likely to be at the level of scoping metrics when the updated PFS is released, but will eventually be upgraded to PFS standards over time.

We have not incorporated this potential change into our NPV valuation of Amapá due to a lack of complete information at present, but the strategy for producing a higher-grade product seems a logical step, particularly as licensing for the mine is likely to take up the rest of 2024, and this optimisation can be explored before construction commences.

Next steps

This year should see Cadence progress licensing for the project. In September 2023, the company announced that the expected timeline for licensing the mine, railway and port in Brazil had been shortened to 12–16 months and it expects licences to be granted over the course of 2024. We understand that the mine and beneficiation plant are relatively straightforward as they are ex-operating assets, but the port will require an additional environmental monitoring survey, with this report to be submitted between June and September 2024, with approval expected in the following three months. All licencing should be completed in calendar year 2024.

In October 2023, Cadence announced that the JV which controls Amapá had entered into an Memorandum of Understanding with Sinoma Tianjin Cement Industry Design and Research Institute (Sinoma). Under this agreement, Sinoma will provide a final proposal to complete a DFS and, on completion, submit a fixed-price engineering, procurement and construction contract for the Amapá project.

It is possible that the mine (given its relatively unusual status as an ex-operating mine) could skip the normal formal movement that projects undergo (from PFS to definitive feasibility study, DFS, to front end engineering and design, FEED, to financing and construction) and that Amapá could progress from PFS straight to FEED/financing.

We continue to believe that a potential equity partner at the project level is the most likely funding route for the equity portion of funding (which could be 20–30% of the capital required, with the balance provided though project debt). This could bring the project through rapid de-risking and be a catalyst for value realisation for Cadence.

Valuation

We value Cadence using a sum-of-the-parts 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 cost approach for its stake in Sonora (changed from a takeout multiple in this note as a result of political uncertainty, as discussed earlier). This results in a base case valuation of £47.7m or 27.6p/share. A full reconciliation of the changes in our valuation of the portfolio is outlined in Exhibit 3 below.

Exhibit 3: Changes to portfolio valuation

Revised
(£m)

Previous
(£m)

Revised (p/share)

Previous (p/share)

Change
(£m)

Comment

European Metals Holdings

1.6

3.7

0.9

2.1

-2.1

Market movement

Hasting Technology Metals

0.0

0.4

0.0

0.2

-0.4

Stake sold

Evergreen Lithium

0.9

1.6

0.5

0.9

-0.7

Market movement

Misc

0.1

0.1

0.1

0.1

0.0

Total of major listed investments

2.6

5.8

1.5

3.3

-3.2

Amapá

41.2

41.3

23.9

23.9

0.4

Stake raised from 32.6% to 33.6%

Sonora

3.9

3.9

2.3

2.3

0.0

Still carried at cost

Base-case valuation

47.7

51.0

27.6

29.5

-2.8

Cadence market valuation

9.5

11.6

5.5

6.7

-2.1

Implied value of unlisted investments

6.9

5.8

4.0

3.4

1.2

Source: Edison Investment Research. Note: Exchange rate has changed from US$1.22/£ to US$1.26/£.

We apply an 84.2% discount to our NPV of Amapá to reflect its PFS stage of development. This reduces our valuation at the project level from US$978m (NPV) to US$154m (PFS adjusted). If the project gains full DFS status, the discount we apply would reduce to 55% and the project value would rise to US$440m (based on PFS metrics), with Cadence’s share of the project worth 44p/share. This is assuming the project metrics are unchanged, and some metrics surrounding the project are likely to be better defined (including capex, operating costs, mine plan and development timelines) as the DFS advances during 2024.

Financials

Cadence is an investment company and its financial accounts represent its ongoing funding needs for general and administrative expenses, as well as investment spending for the 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, which naturally depends on price and timing.

Exhibit 4: Financial summary

Year end 31 December

£000s

2020

2021

2022

2023e

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Income

10,371

1,170

(4,041)

0.0

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

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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.

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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.

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