Cadence Minerals — Real progress, real value

Cadence Minerals (AIM: KDNC)

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Research: Metals & Mining

Cadence Minerals — Real progress, real value

Cadence Minerals remains fundamentally mispriced in our view, with the market not fully recognising the value of its unlisted assets. Cadence has recently announced progress in advancing its major non-public asset, the Amapá iron ore project in Brazil. This includes a memorandum of understanding (MOU) with Chinese firm Sinoma to potentially provide both a definitive feasibility study (DFS) and fixed-price engineering, procurement and construction (EPC) contract for the mine restart. The implied value of Cadence’s non-public assets is 3.4p/share at current prices, while in our view an appropriate value for Amapá alone is 23.9p/share.

Written by

Andrew Keen

MD - Head of Content, Energy & Resources, Industrials

Cadence Minerals_resized

Metals & Mining

Cadence Minerals

Real progress, real value

Company update

Metals and mining

3 November 2023

Price

6.65p

Market cap

£12m

Net cash at 30 June 2023

£0.58m

Shares in issue

180.7m

Free float (as at end September 2023)

93.5%

Code

KDNC

Primary exchange

AIM

Secondary exchange

AQSE

Share price performance

%

1m

3m

12m

Abs

(9.3)

(23.0)

(31.7)

Rel (local)

(8.4)

(21.3)

(33.8)

52-week high/low

17p

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 30% 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 Minerals is a research client of Edison Investment Research Limited

Cadence Minerals remains fundamentally mispriced in our view, with the market not fully recognising the value of its unlisted assets. Cadence has recently announced progress in advancing its major non-public asset, the Amapá iron ore project in Brazil. This includes a memorandum of understanding (MOU) with Chinese firm Sinoma to potentially provide both a definitive feasibility study (DFS) and fixed-price engineering, procurement and construction (EPC) contract for the mine restart. The implied value of Cadence’s non-public assets is 3.4p/share at current prices, while in our view an appropriate value for Amapá alone is 23.9p/share.

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.

Two steps forward

On 30 October Cadence announced that the joint venture (JV) that owns the Amapá iron ore project has entered into an MOU with Sinoma Tianjin Cement Industry Design and Research Co. Ltd (Sinoma). Under this agreement Sinoma will provide a final proposal to complete a DFS and, on completion, submit a fixed-price EPC contract for the Amapá project. This is a beneficial link in our view as it reduces the potential for cost escalation from DFS estimates through to construction. Under the MOU, a subsidiary of Sinoma will also seek the required funding for restarting the mine.

In addition, in September Cadence announced that the expected licensing timeline for the mine, railway and port in Brazil has been shortened to 12–16 months, rather than a typical timeline of 36 months. The revised timeline means that the mine installation licences for the port, railway, beneficiation plant and mine are expected to be granted over the course of 2024. This gives a defined pathway to further derisking over 2024, with the licensing, DFS, EPC contract and financing arrangements all potential catalysts. We continue to see a potential equity partner at the project level as the most likely funding route for the DFS.

Valuation: Still does not make sense

We have reduced our valuation to 29.5p/share from 32.2p/share. This reflects changes in Cadence’s public portfolio, and we also conservatively reduce our valuation of its Sonora lithium assets (from 5.2p/share to 2.3p) due to ongoing political uncertainty in Mexico for lithium assets. We have raised our valuation of its stake in Amapá from 21.1p/share to 23.9p/share to reflect Cadence’s continued earn-in rate (up from 30% 32.6%). Our valuation remains significantly above the market price (390%), with the implied valuation of Cadence’s non-public assets, at just £5.8m, well below where we see fair value.

Investment summary

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, and has a major development project in iron ore.

We value Cadence based on a valuation of its public equities at market prices, and our estimation of the value of its unlisted assets. We have updated our portfolio valuation below for the latest market prices. At its current market price, Cadence has a market valuation of £11.6m. Its stakes in public equities have a market valuation of £5.8m (or 3.4p/share), leaving an implied valuation of its non-public holdings of £5.8m (or 3.4p/share).

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

6.8%

11.7

0.31

64

3.7

2.1

Hastings Technology Metals

1.9%

0.8

0.87

0.45

58

0.4

0.2

Evergreen Lithium

8.7%

15.8

0.20

0.10

19

1.6

0.9

Miscellaneous

0.1

0.1

Total of major listed investments

5.8

3.4

Cadence Minerals market valuation

11.6

6.7

Implied value of non-listed investments

5.8

3.4

Amapá valuation

NPV value (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

127

32.6%

41.3

23.9

Sonora valuation (base case)

3.9

2.3

Value of listed and unlisted investments

51.0

29.5

Source: Edison Investment Research. Note: Prices as 2 November 2023. Exchange rates used: US$1.22/£, £0.52/A$.

We have increased Cadence’s share of Amapá from 30% to 32.6% to reflect Cadence’s latest announcement, which confirmed that up to the end of September 2023, Cadence's total investment in the Amapá project stood at approximately US$12.1m and, as a result, Cadence's equity stake in the project has increased to 32.6%. Our valuation of the project is unchanged, but this increase in its stake has raised our valuation of Cadence’s share from £36.5m (21.1p/share) to £41.3m (23.9p/share).

Cadence is buying into this project at a current rate of approximately US$1m/1pp (its early purchases were at a far lower rate, but that was when the project has significant additional uncertainty). At US$1m/1pp the implied value Cadence is placing on the whole project is c US$100m. Our valuation is higher at the project level (US$154m at PFS stage).

The market reacted positively to the news of the agreement with Sinoma (rising 67% from 4.80p/share to 7.65p/share on 30 October, although it has since traded off to 6.65p/share), but the implied valuation of the unlisted assets is still well below our assessment of their value. Even if no value were to be ascribed to Cadence’s stake in Sonora, the implied market valuation of £5.8m for Cadence’s 32.6% stake in Amapá implies a valuation at the project level (100% basis) of just £17.8m or US$21.7m. This less than one quarter of the value implied by Cadence’s rate or earn-in for the project value (which is approximately US$1m/1pp, or approximately US$100m) and just 14% of our valuation.

Importantly, the valuation of the project should rise considerably as it continues to de-risk. Our valuation of the project fully de-risked is US$978m. We apply an 84.2% discount to reflect its pre-feasibility study (PFS) status, but at full bankable feasibility study (BFS) status this discount would fall from 84.2% to 55.0% (and its discounted value would rise by US$289m from US$154m to US$440m).The project will likely incur funding costs and potentially dilution due to new equity partners, but the discount is greater than we would expect for the project given its current status. In our view there the value of the project to Cadence shareholders is likely to rise significantly if the project continues to advance towards full BFS status.

We are reducing our valuation of Cadence’s interest in the Sonora lithium project to £3.9m (2.3p/share) from £9.0m (5.2p/share). Our previous valuation was based on the takeout valuation paid by Ganfeng Lithium for Bacanora (the developed of the resource), but given ongoing uncertainties regarding the licensing of the project, we believe a prudent approach is to reduce this to a cost basis until title and development of the project is better defined. As we outlined in our recent flash note, the General Directorate of Mines (DGM) in Mexico 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.

Amapá: What has changed?

In the past two months, Cadence has better defined a shorter-licensing timeline for the restart of the Amapá mine and advanced the process for completing a DFS, agreeing an EPC contract and advanced the identification of potential financing sources. It has also increased its equity state in the project to 32.6% (up from 30% in our July note as its spending in the advancement of the project earns it additional equity at a rate in the order of US$1m/1pp).

Licencing pathway

In September Cadence announced that the expected licensing timeline for the mine, railway and port needed in Brazil has been shortened to 12–16 months, rather than a typical timeline of 36 months. The revised timeline means that the mine installation licences for the port, railway, beneficiation plant and mine are expected to be granted in 2024. This gives a defined pathway to further derisking over the course of 2024, with the licencing, DFS, EPC contract and financing arrangements all potential catalysts. We continue to see a potential equity partner at the project level as the most likely funding route for the DFS.

BFS/EPC and contracting arrangements

On 30 October Cadence announced that the JV companies that own the Amapá iron ore project (the Pedra and Branca Alliance and DEV Mineração) have entered into an MOU with Sinoma Tianjin Cement Industry Design & Research Institute, a wholly owned subsidiary of Sinoma International Engineering (for clarity we refer to both as Sinoma). Sinoma is the technology and engineering platform under China National Building Material Group and is listed on the Shanghai Stock Exchange (600970 SH).

Under this MOU Sinoma will provide a final proposal to complete a DFS and, on completion, submit a fixed-price EPC contract for the Amapá project. These services will be provided on a competitive basis and are subject to the project JV partners’ approval. Sinoma will be appointed the general EPC contractor for the project once approvals have been granted and Sinoma facilitates project financing. Cadence has stated that Sinoma is in discussions with SinoSure China Export & Credit Insurance Corporation and China Development Bank regarding potential financing.

No definitive cost for the DFS was included in the announcement. However, we indicated in our initiation note a cost in the order of US$5–8m might be appropriate. The geology of the project is well understood given its status as an ex-operating mine and its previous ownership by Anglo American, but naturally significant additional work will need to be completed in terms of licensing and infrastructure redevelopment.

We estimate the likely timeline is for a finalisation of the DFS quotation in the next couple of months, with funding of the DFS resolved early in 2024, with a completion date around the end of the 2024 calendar year. There are several potential paths to funding the DFS, with the likely preferred path in our view being the introduction of another equity partner at the project level (Cadence has identified this as an option in the past). At Cadence’s current purchase rate (in the order of US$1m/1pp), an equity partner would require 5–8% dilution at the project level, but naturally there are a number of moving parts in how this funding could work. For example the valuation of the project for the dilution could be higher (our valuation is above this earn-in rate), and the funding of the DFS itself is a derisking step. Cadence has had a data room open for interested parties.

One key advantage in having an EPC contractor engaged as the BFS coordinator is that the capital cost will be well defined – not only because an EPC contractor has a skill-base in delivering infrastructure, but also in that Sinoma will deliver a fixed-price EPC contract with the BFS.

Valuation

We value Cadence using a sum-of-the-parts (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 cost approach for its stake in Sonora (changed from a takeout multiple in this note due to political uncertainty, as discussed earlier).

As summarised in Exhibit 2, this results in a base case valuation of £51m or 29.5p/share. A full reconciliation of the changes in our valuation of the portfolio is outlined in Exhibit 2 below.

Exhibit 2: Changes to portfolio valuation

Revised
(£m)

Previous
(£m)

Revised (p/share)

Previous (p/share)

Change
(£m)

Comment

European Metals Holdings

3.7

5.2

2.1

3.0

(1.5)

Market movement

Hasting Technology Metals

0.4

2.1

0.2

1.2

(1.7)

Market movement

Evergreen Lithium

1.6

2.7

0.9

1.6

(1.1)

Market movement

Misc

0.1

0.2

0.1

0.1

(0.1)

Total of major listed investments

5.8

10.2

3.3

5.9

(4.4)

Amapá

41.3

36.5

23.9

21.1

4.8

Increased stake (30 to 32.6%)

Sonora

3.9

9.0

2.3

5.2

(5.1)

Moved to a cost-based valuation

Base case valuation

51.0

55.7

29.5

32.2

(4.7)

Cadence market valuation

11.6

12.7

6.7

7.4

(1.1)

Implied value of unlisted investments

5.8

2.5

3.4

1.5

3.3

Source: Edison Investment Research

We apply an 84.2% discount to our NPV valuation of Amapá to reflect its PFS stage of development. This reduces our valuation at the project level from US$978m (NPV valuation) to $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 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. We highlight that despite some difficult markets for mining equities generally, commodity markets have been relatively robust. In our valuation of Amapá we have assumed a long-run iron ore price of US$100/t (basis 62% delivered to China) and while spot prices should not determine long-run assumptions, it is worth noting that spot prices are currently c 20% above our assumptions.

Exhibit 3: Iron ore spot prices delivered to China

Source: Bloomberg, Edison Investment Research

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, naturally depending on price and timing.

Exhibit 4: 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

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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.

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.

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United Kingdom

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Mendus — ADVANCE II at ASH may be a near-term catalyst

Mendus has announced that it has been granted three abstracts, including an oral presentation at the American Society of Hematology (ASH) 2023 meeting, relating to the clinical development of vididencel as a maintenance therapy for acute myeloid leukaemia (AML). There are limited treatment options for AML maintenance, which is likely a key consideration in the selection of ADVANCE II data for an oral presentation. The update is anticipated to include relapse-free survival (RFS) and overall survival (OS) data on 11 December 2023, and if positive, could add to a growing package of validation for vididencel as a novel cancer maintenance treatment in AML and support its mode of action. We note that Mendus is also preparing for an additional Phase II combination trial with Onureg, which we view as a favourable strategic decision (on track to commence by end-2023). We note that interim results from ADVANCE II were previously reported in December 2022, showing a potentially competitive profile over the standard of care, Onureg.

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