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GBP21m
Research: Metals & Mining
Cadence Minerals has provided an update on the status of the Sonora lithium project in Mexico. The company holds a 30% interest in seven project concessions through the JV entities Mexilit and Megalit, which are majority controlled by Ganfeng. Following the amendments to the Mexican mining law introduced in April and May 2023, the General Directorate of Mines (DGM) issued a formal notice indicating that all lithium concessions underpinning the Sonora project were cancelled, citing a lack of sufficient disclosure regarding the minimum investment obligations. Both Ganfeng and Cadence believe that the required obligations were met in full and sufficient evidence was provided to the Mexican authorities. The decision is not final and is subject to ongoing appeals. While the news is somewhat disappointing, we note that Sonora represents a relatively small part of our valuation of Cadence, which is driven by the Amapá iron ore project.
Cadence Minerals |
Sonora project update |
Project update |
Metals and mining |
31 August 2023 |
Share price performance
Business description
Analysts
Cadence Minerals is a research client of Edison Investment Research Limited |
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Cadence Minerals has provided an update on the status of the Sonora lithium project in Mexico. The company holds a 30% interest in seven project concessions through the JV entities Mexilit and Megalit, which are majority controlled by Ganfeng. Following the amendments to the Mexican mining law introduced in April and May 2023, the General Directorate of Mines (DGM) issued a formal notice indicating that all lithium concessions underpinning the Sonora project were cancelled, citing a lack of sufficient disclosure regarding the minimum investment obligations. Both Ganfeng and Cadence believe that the required obligations were met in full and sufficient evidence was provided to the Mexican authorities. The decision is not final and is subject to ongoing appeals. While the news is somewhat disappointing, we note that Sonora represents a relatively small part of our valuation of Cadence, which is driven by the Amapá iron ore project.
Year end |
Income* |
PBT** |
EPS** |
DPS |
P/E |
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.
The Sonora lithium project consists of nine granted concessions and is being developed by Ganfeng. Cadence holds interests in seven concessions through its 30% ownership of the Mexilit and Megalit JVs with Ganfeng, which controls the remaining 70% in the entities. In April and May, the Mexican government approved amendments to the mining law, declaring lithium a strategic sector and granting a state-owned entity an exclusive right to engage in lithium mining operations. Cadence and Ganfeng believe that these amendments do not apply to pre-existing concessions, Sonora in particular, and therefore should not affect the project’s status. This is consistent with the terms of Mexico’s constitution.
Nonetheless, the DGM initiated a review of the nine concessions underpinning the Sonora project and in August issued a formal cancellation decision, citing the failure to submit sufficient evidence of meeting the required minimum investments. Both companies are of the opinion that the minimum investment threshold was met, and the required information was provided to the authorities in a timely manner. The DGM decision is not final and is subject to appeals. Ganfeng continues to engage with the Mexican authorities, but no agreement has been reached so far.
While the news is disappointing, we note that Sonora represents 16% of our base case SOTP valuation of Cadence of 32.2p/share (13% of our bull case valuation of 57.1p). As we noted in our initiation report, the development and progression of Sonora is uncertain, and our value of the project allows for the political risks in Mexico. Importantly, the company’s focus remains solely on the Amapá iron ore project, whose value contributes 21.1p/share to our base case valuation of Cadence (43.5p bull case). We believe the market appears to be placing little value on Amapá and see the de-risking of the project through progressing to full bankable feasibility study status and securing a JV partner as the main catalysts for Cadence in the near term.
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Research: Industrials
paragon continued its debt reduction programme in Q223 with the disposal of semvox. Operating performance progressed positively with H123 sales rising 7% and EBITDA margin in Q223 exceeding 10%, although the business mix shifted towards Mechanics as new contracts ramped up. Management has maintained FY23 guidance and we have modestly reduced our earnings estimates to reflect the mix change as well as higher interest in FY23. As the debt reduction programme continues into FY24 we expect lower interest charges and improving operational cash flows. Assuming the successful further partial redemption of the Eurobond by January 2024, investor focus should return to the growth potential.