Cadence Minerals — Real progress, real value

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).

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.

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).

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.

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.

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.

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.

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.