Cadence Minerals — Steadily cantering through

Cadence Minerals (LN: KDNC)

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Research: Metals & Mining

Cadence Minerals — Steadily cantering through

Until now, Cadence’s (KDNC) various direct and indirect project interests have been viewed largely on their respective market valuations. With three main technical studies now published, however, there is enough information to warrant at least early-stage assessment of the Cinovec lithium project (held by European Metals Holdings) on a DCF basis and, to a lesser extent, the value attributable to Cadence via its direct holding in the Yangibana rare earth project, held 70:30 with Hastings Technology Metals.

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Metals & Mining

Cadence Minerals

Steadily cantering through

Valuation updated

Metals & mining

11 May 2017

Price

0.48p

Market cap

£37m

US$1.2912/£, C$1.7698/£, A$1.7298/£

Net debt (£m) at 31 December 2015

1.5

Shares in issue

7,777.8m

Free float

100%

Code

KDNC

Primary exchange

AIM

Secondary exchange

OTC

Share price performance

%

1m

3m

12m

Abs

(3.0)

(5.9)

(9.4)

Rel (local)

(3.5)

(8.2)

(24.5)

52-week high/low

0.9p

0.4p

Business description

Cadence is a minerals investment company with direct and indirect interests in lithium and rare earth projects. Its primary value proposition is a 43.9% effective interest in the Mexilit concessions of the Sonora Lithium Project in Northern Mexico, but also an increasing interest in the strategically located Cinovec lithium-tin project on the Czech-German border in which it has a 21% equity interest in the parent, European Metals Holdings.

Next events

FY16 results

May 2017

AGM

June 2017

Analysts

Charles Gibson

+44 (0)20 3077 5724

Tom Hayes

+44 (0)20 3077 5725

Cadence Minerals is a research client of Edison Investment Research Limited

Until now, Cadence’s (KDNC) various direct and indirect project interests have been viewed largely on their respective market valuations. With three main technical studies now published, however, there is enough information to warrant at least early-stage assessment of the Cinovec lithium project (held by European Metals Holdings) on a DCF basis and, to a lesser extent, the value attributable to Cadence via its direct holding in the Yangibana rare earth project, held 70:30 with Hastings Technology Metals.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

0.0

(0.7)

(0.02)

0.0

N/A

N/A

12/14

0.0

(1.6)

(0.03)

0.0

N/A

N/A

12/15

0.0

(2.1)

(0.03)

0.0

N/A

N/A

12/16e

0.0

(2.2)

(0.03)

0.0

N/A

N/A

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

Standardised prices across all valuations

We have sought to standardise metal prices across all projects. We use a long-term price for lithium of US$7,500/t (vs a current spot price in the region of US$10,000/t), US19,000/t for tin (cf spot at US$19,925/t) and use Hastings’ consultant’s view of REE prices, as well as two other price decks (Alkane Resources and spot prices) to provide a range of values for Yangibana.

Valuation: Potential 67% upside to current share price

Our total value for Cadence is now 0.80p per share. Cadence has minority holdings in two exploration-stage companies, MacArthur Minerals (TSX: MMS) and European Metals Holdings (ASX/AIM: EMH). Cadence’s 20.76% interest in EMH is currently worth £15.5m (0.20p/sh), while its 16.3% interest in MMS is worth £1.2m (0.01p/sh). Together with its equity holding in Bacanora (£16.8m, or 0.22p/sh), these equity holdings are worth an aggregate £33.4m (0.43p/sh), to which an additional £17.3m (0.22p/sh) may be added in respect of Cadence’s direct interests in Sonora, based on a valuation pro rata to Bacanora’s resource multiple derived from its interests in the same project (if not exactly the same concessions). We view Hastings Technology Metals’ 8 April 2016 PFS announcement as very early stage. However, for illustrative purposes, a further 0.23p could be added to our valuation of Cadence for this asset, to give a total valuation for Cadence of 0.80p per share, after deducting 0.08p in net debt. Upside to MMS is clearly linked to its proving successful in delineating a maiden lithium resource over its not yet granted exploration licences. We expect VW, which is reported to be considering investing c US$11bn into developing its electric vehicle range by 2025, to be a key catalyst to EMH and its strategically placed Cinovec project on the Czech/German border. Note that, should EMH be successful in increasing its share price to close to the A$4.05/sh value derived from its recent PFS at Cinovec, we calculate that it would add 0.61p to our valuation of Cadence. Bacanora’s doing the same would add 1.10p (see page 11). By contrast, complete conversion of the remainder of its convertible loan note outstanding would dilute our valuation from 0.80p to 0.74p.

Cadence’s value by project

The following sections seek to provide an overview of the value attributable to Cadence based on the most up-to-date technical information available, including the PFSs for Cinovec and Yangibana published in April 2017 and March 2016, respectively. A summary table of the valuation assumptions we use for our revised DCF valuation for Cinovec and Yangibana is given in Exhibit 4 and an overview of the group valuation in Exhibits 9 and 10. As Cadence does not have a direct interest in the Cinovec project, we value EMH on the basis of Cadence’s equity interest only. The Yangibana concession, in which Cadence has a 30% direct interest, is the smallest of the three concessions that will be mined, and we do not have clarity over the timing of Cadence’s attributable cash flows from the potential mining of this project. As such, we only provide an illustrative value for Cadence’s interest in this project.

The Cinovec tin-lithium project

The Cinovec tin-lithium project is held 100% by EMH, in which Cadence has a 20.76% equity interest. Cinovec is on the German/Czech Republic border, 100km north-west of Prague, in an area that was historically mined for tin for more than 600 years. EMH estimates that 40,000 tonnes of tin have been extracted from the area over this period. Nonetheless, with 2.8Mt of contained lithium in the indicated and inferred resource categories, it is the largest lithium deposit in Europe, the fourth largest, non-brine lithium deposit in the world and a globally significant tin resource.

Work in progress – upgrading the grade

Hitherto, Cinovec had very little modern drilling data completed on it and, consequently, EMH was initially only able to complete a very rudimentary scoping study analysis on the project.

As a result, a comprehensive drill programme at Cinovec has been underway since the end of 2015, with drill results released to the market as assay data became available. Importantly, results confirmed historical drill data, which facilitated the estimation of an updated JORC-compliant resource. Although, the lithium grade at Cinovec is relatively low (c 0.5% to 1.0% range), it is rendered economically viable by meaningful tin, tungsten and potash credits. The following exhibit provides a typical long section of Cinovec mineralisation (a long section is just a cross-section view where dips of strata and orebodies are shown in their apparent rather than true aspect).

Exhibit 1: Cinovec long section showing coincidence of Sn-W resource and Li mineralisation

Source: EMH

Significantly, the geology of the payable ore is largely flat or shallow dipping and massive enough to be amenable to mechanised mining using long-hole, open stope methods. In addition, the paramagnetic qualities of zinnwaldite also make it amenable to wet high-intensity magnetic processing to produce a concentrate and hold out the prospect of Cinovec’s being the world’s lowest-cost, hard rock producer of lithium carbonate.

Pre-feasibility study

On 19 April, EMH released the results of a pre-feasibility study (PFS) prepared by the company, based on technical reports undertaken by consultants Hatch, Ausenco, Bara Consulting and Widenbar & Associates, among others. Whereas EMH’s earlier scoping study was based on an as yet uncommercialised proprietary process technology, for the purposes of the PFS it was concluded that conventional roasting technology would deliver higher lithium recoveries at a lower operating cost and lower technical risk, with fewer impurities and a lower dependence on by-product credits. As a result, the PFS materially re-imagined the project at a higher grade (as a consequence of the intervening exploration drilling) to produce 28% more battery-grade lithium carbonate equivalent (LCE) per annum and three times more potash.

As before, natural gas is available and can be delivered to the project fence by pipeline to supply low-cost energy for roasting the mica concentrate, as well as heating the underground mining operations. At the same time, the project’s electricity requirement of 22MW can be provided by constructing a 1km overhead line to the existing (grid) switchyard in Teplice. Dewatering will supply the bulk of process water requirements, although potable and industrial water for processing make-up requirements can also be purchased from the local municipality.

The major technical parameters of the Cinovec project PFS are provided in Exhibit 4. At a lithium carbonate price of US$10,000/t (vs US$7,500-10,000/t currently), a sulphate of potash price of US$520/t (vs €410/t currently), a tin price of US$22,500/t (vs US$19,850/t currently) and a tungsten price of US$330/mtu (vs US$206/mtu currently), however, the project was calculated to yield a 21.6% pre-tax internal rate of return (IRR) per annum and a net present value (at our standardised 10% discount rate) of US$392m.

Owing to Cadence not having a direct interest in Cinovec and only having a minority equity holding in EMH, we do not use the PFS to attribute any direct value from Cinovec to Cadence. Nevertheless, it is noteworthy that the NPV10 calculated for Cinovec in the PFS equates to a value per EMH share of US$3.03/sh (or A$4.05/sh) compared to an EMH share price at the time of writing of A$0.995, ie EMH’s shares are trading at 24.5% of the calculated NPV of the project.

The Yangibana rare earth element project

The project is located in north-west Western Australia, approximately 300km east inland from Carnarvon. Cadence has a 30% direct interest (free-carried to BFS) in the Yangibana deposit, which comprises approximately 16% of the Yangibana project, by pit tonnage (see Exhibit 2). Hastings is project manager with a 70% interest. Note that no detail was given in the Hastings Technology Metals’ PFS announcement of 8 April 2016 as to the timing of mining at Yangibana.

In the meantime, however, the project has stated JORC code-compliant resources of 12.4Mt at an average total rare earth oxide (TREO) grade of 1.10%. This is a relatively low grade for a rare earth project. Significantly, however, there has been enrichment of strategically important ‘critical’ rare earth elements, which is the reason that Hastings has targeted production of only the most lucrative rare earth elements as detailed below. Note that the term ‘critical rare earths’ was first coined in a US Department of Energy Critical Materials Strategy study in 2011 and refers to five specific rare earth elements: dysprosium, europium, neodymium, terbium and praseodymium.

The development scope outlined in the 8 April 2016 Yangibana PFS summary details the production of six ‘target’ oxides. These oxides are the precursor feedstock to refined rare earth metal, as well as a host of other alloys. Hastings’ six target rare earth oxides are:

neodymium oxide

praseodymium oxide

dysprosium oxide

europium oxide

gadolinium oxide; and

samarium oxide.

Four of these six target oxides are deemed ‘critical’ by the US Department of Energy, owing to their lack of production outside China and their use in numerous high-tech, military and green-tech applications. Samarium and gadolinium are also important due to their scarce supply outside China.

Exhibit 2: Yangibana REE project open-pit characteristics

Bald Hill South

Fraser's

Yangibana

Total

Pit size

kt

21,903

39,357

12,102

73,362

Strip ratio

W:O

6.3

10.2

20.3

9.4

Mining inventory

kt

2,997

3,507

569

7,074

Waste

kt

18,906

35,849

11,533

66,289

TREO

%

0.86

1.43

0.97

1.15

Source: Hastings Technology Metals

The Yangibana project PFS details a pre-tax NPV valuation at an 8% discount rate of A$700-750m. We caution that this valuation is based on the projections of REE prices given by Hastings’ consultants in Exhibit 12 and we provide a comparison with REE spot prices and those REE prices used by Alkane Resources to underpin the value of its flagship Dubbo Zirconia Project in NSW, Australia.

Exhibit 3 provides detail on the overall cost of production at the Yangibana REE project. Note that the unit cost values given below relate to the production of concentrate, while the price deck gives values per refined REE metal; as such, these two values should not be compared directly.

Exhibit 3: Yangibana operating cost breakdown

Category

Total LOM value low-end (US$m)

Total LOM value upper-end (US$m)

Unit cost low-end (US$/t)

Unit cost upper-end (US$/t)

Contract mining

340

350

340

350

Labour

175

190

175

190

Power/fuel

65

75

65

75

Product transport

45

55

45

55

Toll treatment

240

250

240

250

Reagents

575

600

575

600

Other

90

110

90

110

Total US$/t of REE oxide concentrate produced

1,530

1,630

Source: Hastings Technology Metals’ Yangibana PFS summary

Subsequent to the publication of its PFS, Hastings announced a major resource upgrade at Yangibana in January 2017 and also, in March, that it had successfully completed continuous beneficiation pilot plant testing. The significance of the latter, in particular, was that it a) successfully validated the Yangibana flotation process, b) confirmed 70% TREO recovery at a final concentrate grade of 23% TREO, c) provided a clear indication of progress from bench scale to commercial production, d) successfully generated bulk samples for downstream engineering equipment design testwork, and e) generated concentrate for subsequent hydrometallurgy pilot plant operation.

Illustrative value for Cadence’s interest in Yangibana

On a 100% basis, the ore tonnages set out in Exhibit 2 for the Yangibana deposit constitute only 16% of the total ore tonnages mined across all three deposits. Cadence’s 30% direct interest in the Yangibana deposit therefore provides Cadence with c 5% of the total tonnages mined across all deposits.

For illustrative purposes, 5% of the entire project’s value based on the outcome of the PFS (we have reconstructed the DCF based on the detail provided in the 8 April 2016 announcement) potentially results in a c A$35m or c £18m valuation, which equates to 0.23p per Cadence share (pre-tax, undiluted and at a 10% discount rate).

Self-evidently, the application of a 5% factor applied to the NPV of a project based on a mine plan back-engineered from the detail provided in a regulatory ASX announcement on the basis of pit tonnages alone is subject to a degree of error and the reason that Edison describes this valuation as ‘illustrative’ only. Our ultimate valuation will depend upon a number of factors including, not least, the scheduling of the Yangibana pit tonnages relative to those of Bald Pit South and Fraser’s. Alternatively, value could be imputed to Yangibana via Hastings market capitalisation. In this case, Hastings market value of A$46.2m for a 70% interest in the Yangibana project implies a A$66m valuation for a 100% interest and a A$19.8m valuation for Cadence’s 30% interest – or 0.15p per Cadence share.

Project characteristics and basis for valuation

The following exhibit gives the valuation assumptions in the technical reports, which are used to assess the value of the projects in which Cadence has direct and indirect interests.

Exhibit 4: Summary of project assumptions taken from company technical reports

Cinovec

Sonora

Yangibana

Parameter

Unit

Value

Parameter

Unit

Stage 1 Value

Stage 2 Value

Parameter

Unit

Value

Technical study level

PFS

Technical study level

PFS

Technical study level

PFS

Mining

Feed rate

Mtpa

1.7

Feed rate

Mtpa

17,500

35,000

Feed rate

Mtpa

1

Li feed grade

%

0.65

Li feed grade

ppm (LOM average)

3,525

3,525

Li feed grade

 

Unplanned dilution

%

3

Dilution assumed

%

10

Dilution assumed

10

Life of mine

years

21

Life of mine

years

20

Life of mine

years

7

Recovery

Concentrate mass pull

%

2.1

Concentrate mass pull

%

3.1

Lithium recovery

%

76.5

LCE recovery

%

55

TREO recovery

%

78

Tin recovery

%

65.0

K2SO4 recovery

%

57

TREO concentrate (x5 no.) grade

%

30

Production

LCE production

avg. tpa

20,800

LCE production

tpa

17,500

35,000

REO production

tpa

8,643

Potash production

avg. tpa

12,954

K2SO4 production

tpa

9,975

19,950

Costs

Mining

US$/t LCE

1,960

Mining

US$/t LCE

642

538

Mining cost

US$/t

See Exhibit 3

Comminution, etc

US$/t LCE

935

Processing (Li)

US$/t LCE

2,037

1,930

Processing (Li)

US$/t

See Exhibit 3

Processing (Li)

US$/t LCE

2,274

Processing (Sn & W)

US$/t

See Exhibit 3

G&A

US$/t LCE

42

G&A

US$/t LCE

446

212

By-product credits

US$/t LCE

1,728

Total unit cost

US$/t LCE

3,483

Total unit cost

US$/t LCE

3,125

2,680

Total unit cost

See Exhibit 3

Financial

Royalty

% of sales

7.5

7.5

Royalty

%

2.5

Capex

(Median value)

 

Mining

US$m

70.3

Stage 1

US$m

240.0

N/A

Mining

US$m

32.5

Comminution, etc

US$m

104.9

Stage 2

US$m

177.1

N/A

Processing

US$m

135.0

Processing (Li)

US$m

179.9

Infrastructure

US$m

32.5

Tailings

US$m

2.6

EPCM, etc

US$m

62.5

Contingency

35.8

Other

US$m

72.5

Contingency

US$m

72.5

Total capex

US$m

393.4

Total capex

US$m

417.1

0.00

Total capex

US$m

407.5

Source: Company technical reports. Note: Totals may not add up owing to rounding.

The Sonora lithium project

The Sonora lithium project includes concessions owned by two subsidiary companies, Megalit and Mexilit. Cadence directly owns 30% of Mexilit (ie excluding its indirect interest held via its Bacanora shareholding) and, as such, is 30% owner of the El Sauz, El Sauz 1, El Sauz 2, Fleur and Fleur 1 concessions. The concessions held under Megalit are solely owned by Bacanora Minerals and are named La Ventana and La Ventana 1. Cadence’s current equity holding in Bacanora Minerals is 19.8% and, as such, its effective interest in Mexilit is 43.9%.

In January 2016, we suspended our original 2.40p valuation. This tentative value of 2.40p was based on our then top-level understanding of cash flows from Sonora and Cadence receiving a 40.06% share of cash flows from the Fleur-El Sauz concessions at the start of production. However, uncertainty as to the actual mine schedule and, in particular, the balance and timing of mining from the Fleur-El Sauz concessions (in which Cadence has a 30% direct stake) as opposed to the Ventana concessions (in which it has no direct interest) has caused us to temporarily suspend this valuation, pending greater clarity from the partners on this issue, and to instead revert to a resource-based valuation, in which Cadence’s direct interests in the various concessions are valued with respect to Bacanora’s resource multiple as follows:

Exhibit 5: Sonora mineral resource estimate

Concession and classification

Owner and
operator

Unit

Mt

Grade (Li ppm)

Contained metal
(Kt Li)

Contained metal
(kt LCE)

Direct cadence interest (%)

Direct cadence interest (kt LCE)

Direct Bacanora interest
(%)

Direct Bacanora interest
(kt LCE)

Indicated

La Ventana

Minera Sonora Borax

Lower Clay

64

3,700

235

1,252

0

0

99.9

1,251

La Ventana

Minera Sonora Borax

Upper Clay

32

2,100

68

363

0

0

99.9

363

El Sauz

Mexilit

Lower Clay

58

3,000

174

928

30

278

70.0

650

El Sauz

Mexilit

Upper Clay

14

2,100

28

151

30

45

70.0

106

Fleur

Mexilit

Lower Clay

60

4,300

256

1,363

30

409

70.0

954

Fleur

Mexilit

Upper Clay

27

2,200

59

316

30

95

70.0

221

El Sauz1

Mexilit

Lower Clay

4

4,000

15

80

30

24

70.0

56

El Sauz1

Mexilit

Upper Clay

1

2,200

2

10

30

3

70.0

7

Subtotal

259

3,200

839

4,463

854

3,607

Inferred

La Ventana

Minera Sonora Borax

Lower Clay

45

4,300

194

1,029

0

0

99.9

1,028

La Ventana

Minera Sonora Borax

Upper Clay

45

2,000

90

479

0

0

99.9

479

El Sauz

Mexilit

Lower Clay

20

2,500

50

266

30

80

70.0

186

El Sauz

Mexilit

Upper Clay

5

1,900

10

51

30

15

70.0

36

Fleur

Mexilit

Lower Clay

20

4,300

86

458

30

137

70.0

321

Fleur

Mexilit

Upper Clay

5

2,800

14

74

30

22

70.0

52

El Sauz1

Mexilit

Lower Clay

15

4,000

60

319

30

96

70.0

223

El Sauz1

Mexilit

Upper Clay

5

2400

12

64

30

19

70.0

45

Subtotal

160

3,200

515

2,740

370

2,369

Grand total

419

3,232

1,354

7,203

1,224

5,976

Source: Bacanora (Amended Mineral Resource Estimate Update for the Sonora Lithium Project, Mexico, dated April 2016), Edison Investment Research

Excluding its borate interests, Bacanora’s enterprise value of C$149.4m, or US$109.2m, thus equates to a resource multiple of US$18.28 per in-situ tonne of LCE resource (cf a global average valuation of US$25.72/t LCE as calculated in our report, Normalisation augers well for exploration, published in October 2016). Using US$18.28/t LCE as an appropriate benchmark, Cadence’s directly owned attributable resource (ie excluding its indirect interest via its shareholding in Bacanora) of 1,224kt of in-situ LCE would therefore have a pro rata value to Cadence of US$22.4m, or £17.3m, or 0.22p per Cadence share (see Exhibit 10).


MMS

Cadence began acquiring its 16.3% equity interest in TSE-listed MMS in March 2016. The company is an early-stage lithium exploration company, with 17 exploration licence applications waiting to be granted in the highly prospective Pilgangoora region of the Pilbara, in northern Western Australia. While these applications are approved by the Western Australian authorities, MacArthur will undertake further reconnaissance activities over these licence applications. This will involve sampling of identified pegmatites and further helicopter reconnaissance of its Pilbara acreage.

Existing lithium mineral resources in Western Australia

Other Western Australian lithium resources are given in the following exhibit. Note that Talison is 49% owned by Rockwood Holdings (NYSE: ROC) and is in production. Galaxy Resources and its JV partner General Mining produce lithium from its Mt Cattlin mine. Both are outside the Pilgangoora region.

Exhibit 6: Other Western Australian lithium resources

Company name

Project name

Measured

Indicated

Inferred

Total

Rock type

Date of resource announcement

Mt

Grade % LiO2

Mt

Grade % LiO2

Mt

Grade % LiO2

Mt

Grade % LiO2

Talison

Greenbushes

0.6

3.2%

117.9

2.4%

2.1

2.0%

120.6

2.4%

Spodumene

30/09/2012

Altura Mining

Pilgangoora project

N/A

N/A

26.7

1.1%

9.0

1.0%

35.7

1.1%

Spodumene

11/02/2016

Pilbara Minerals

Pilgangoora Li-Ta project

N/A

N/A

35.7

1.3%

44.5

1.2%

80.2

1.3%

Spodumene

01/02/2016

Galaxy Resources

Mt Cattlin

2.5

1.2%

9.5

1.1%

4.3

1.1%

16.4

1.1%

Spodumene

04/08/2015

Neometals

Mt Marion

N/A

N/A

10.1

1.5%

13.2

1.3%

23.2

1.4%

Spodumene

25/10/2015

Source: Edison Investment Research. Note: to convert into LCE terms, multiply LiO2 value by 2.473.

The lithium resources closest to MMS’s licence applications are those of Altura Mining’s Pilgangoora lithium-tantalum project and also Pilbara Minerals’ similarly named Pilgangoora lithium project. The grade and size of these resources are presented alongside their global peers in Exhibit 6. As can be seen below, Pilbara Minerals’ resource is a relative outlier in terms of its size, as it is the largest of the hard rock, spodumene-type deposits and is exceeded only by the very large brine deposits (Kings Valley, Salar de Olaroz, Cauchari-Olaroz and Sal de Vida) as well as Bacanora Minerals’ and Cadence’s Sonora deposit and EMH’s Cinovec, which are clay-based.

Exhibit 7: Lithium resource sizes stated in LCE terms

Source: Edison Investment Research, company data

The aim for MMS will be to replicate the size and grade of Pilbara Minerals’ lithium resource of 80Mt at c 1.26% LiO2 (note: this is presented in LCE terms in Exhibit 7). As of 4 May 2017, Pilbara Minerals had a market capitalisation of A$479m, although this is also likely to reflect the market valuing its near-term production asset, Tabba-Tabba tantalum. Current EV/t valuations for each of the companies operating in the Pilgangoora region are given in the following exhibit for reference.

Exhibit 8: EV/t valuations for Pilgangoora region lithium companies

Source: Edison Investment Research. Note: Priced at 5 May 2017.

The value of companies operating in the Pilgangoora region is largely driven by companies that have recently entered or are due to enter production shortly. Only Dakota Minerals is at a similar stage of development to MacArthur, although the former has released a maiden resource estimate, which MMS has yet to do.

MMS currently has a market cap of C$12.6m, compared with Dakota Minerals’ A$20m (C$20m).

Summary of Cadence base case valuation

Inevitably, our new valuation remains largely based on KDNC’s equity interests:

Exhibit 9: Valuation of Cadence’s lithium-focused equity interests

Mark-to-market shareholding valuations – as of 15 June 2016

Cadence equity interest (%)

Market cap
(primary listing currency)

Attr. value
(£)

Per Cadence share (pence)

Hastings

0.00

A$46,200,000

0

0.00

MMS

16.30

C$12,600,000

1,160,470

0.01

Bacanora Minerals

17.18

C$173,200,000

16,813,064

0.22

EMH

20.76

A$128,800,000

15,457,787

0.20

Total current value

33,431,321

0.43

Source: Edison Investment Research. Note: priced at 28 April 2017. C$1.7698/£, A$1.7298/£.

However, between 38.5% and 56.25% of the total valuation now also depends on the value and/or the potential value of its direct mineral interests as well. The following exhibit gives a breakdown of our overall valuation for Cadence based on its equity interests and direct project ownership.

Exhibit 10: Summary of Cadence valuation

Project/equity

Method of valuation

Valuation (pence)

Hastings

Market value of Cadence interest

0.00

MMS

Market value of Cadence interest

0.01

Bacanora Minerals

Market value of Cadence interest

0.22

EMH

Market value of Cadence interest

0.20

Sonora

Resource valued pro-rata to Bacanora resource multiple

0.22

Subtotal

0.65

Net cash/(debt) est as at end-Dec 2016

(0.08)

Subtotal

0.57

Yangibana

5% of project NPV10*

0.23

Total

0.80

Source: Edison Investment Research. Note: *See page 5. Totals may not add up owing to rounding.

On this basis, our current base case valuation for Cadence is a total of 0.80p, including 0.23p attributed to the early-stage value to which Cadence is exposed via its direct interest in Yangibana. Further upside is self-evidently linked to further increases in the value of Cadence’s lithium-focused equity interests – especially the potential for MMS to see a significant increase in its market value when its exploration licences are approved by the Western Australian government.

Sensitivities and risks

Return to resource-based valuation of Sonora

Sonora holds one of the world’s largest lithium resources and benefits from its being both high grade and scalable. The project, which is located in an existing mining district and has excellent access to infrastructure, consists of 10 contiguous concessions covering 104,064ha and is located 190km north-east of Hermosillo in Northern Mexico.

On 15 April 2016, Bacanora published its technical report on the PFS for Sonora. The main conclusions of the study are shown in Exhibit 11.

Exhibit 11: Sonora Lithium project key findings

Measure (units)

Value

Average annual production (tpa lithium carbonate)

35,000

Average operating cost (US$/t lithium carbonate)

2,100*

Initial capex (US$m)

240

Pre-tax IRR (%)

28

Average annual EBITDA (US$m)

127**

Stage 2 capex (US$m)

178

Post-tax NPV8 (US$m)

542

Measure (units)

Average annual production (tpa lithium carbonate)

Average operating cost (US$/t lithium carbonate)

Initial capex (US$m)

Pre-tax IRR (%)

Average annual EBITDA (US$m)

Stage 2 capex (US$m)

Post-tax NPV8 (US$m)

Value

35,000

2,100*

240

28

127**

178

542

Source: Bacanora Minerals. Note: *Net of by-products. **Including co-products.

Edison estimates that Bacanora’s total economic interest in Sonora is 82.52% (effectively a time-weighted average of its 100% interests in the underlying concessions and its 70% interests). On this basis, the NPV8 of the project (US$542m) equates to US$3.63 (£2.81) per Bacanora share on an attributable basis (cf Bacanora’s share price of 85p at the time of writing).

Ordinarily, Edison would use a valid and timely PFS as the basis for its valuation of Cadence’s direct interest in Sonora. In this case, however, given uncertainty surrounding the exact timing of the ore in the concessions in which Cadence has a 30% direct interest versus those in which Cadence has no interest, we have instead opted to value Cadence’s attributable resource on the basis of the in-situ resource multiple implied by Bacanora’s current market valuation, pending greater clarity on this issue. While apparently somewhat recidivist in nature, such an approach is also, a priori, more conservative in nature and, we believe, therefore not inappropriate under the circumstances, albeit it inherently implies an equivalence between all resource tonnes in the various concessions that has yet to be confirmed or determined.

Hastings rare earth price deck very bullish

The rare earth market is highly opaque so it is difficult to ascertain appropriate pricing data for each metal. Therefore, we have compared Hastings’ consultant’s (Adamus Intelligence) estimate (April 2016) of long-term rare earths pricing against that used in Alkane Resources’ financial assessment of its Dubbo Zirconium Project (August 2015). For the five metals that both projects have in common, other than for samarium, which is produced in low volumes at the Yangibana project, all rare earth prices used by Hastings are significantly higher than those used by Alkane Resources, and both are significantly higher than spot. For reference, in the following exhibit we show the value of Yangibana based on its PFS using both price decks and also at spot.

Exhibit 12: Price decks used to value Yangibana

REE price decks (US$/kg)

Unit

Adamus Intelligence (2019e)

Alkane
(2020e)

Spot at
10/05/2017

Source of
spot metal prices

Nd2O3

US$/kg

103.7

60

46

Thomson Reuters/MySteel

Pr2O3

US$/kg

92.6

80

47

Thomson Reuters/MySteel

Dy2O3

US$/kg

481.0

350

175

Thomson Reuters/MySteel

Eu2O3

US$/kg

420.5

300

85

Thomson Reuters/MySteel

Gd2O3

US$/kg

49.6

20

13

Thomson Reuters/MySteel

NPV10 (pre-tax) A$m*

693

191

-464

Source: Thomson Reuters/MySteel. Note: *Edison estimates; US$0.73/A$.

For an illustrative value of Cadence’s 30% interest in Yangibana, please see page 4.

No trialled flow sheet design – critical for rare earth projects

For sale agreements to be signed for rare earths projects, a critical-path component is a proven flow sheet design tested at the pilot plant (not bench/laboratory) scale. The sale of rare earths, whether in oxide, carbonate or refined metal form, requires years of testing with samples from the pilot plant sent to potential customers for quality assessment. Laboratory-scale bench-testing of the flow sheet design cannot provide the assurance of product quality and consistency of output from a rare earth project that a pilot plant can. We believe this aspect of Yangibana’s development could take upwards of one to two years to complete on an expedited basis – notwithstanding Hastings’ plans to sell only six rare earth oxide products. Following completion of a pilot scale test programme, commercial offtake agreements can then be finalised and any project financing arranged.

Financials

Cadence’s audited FY15 financial results were announced on 6 June 2016. At end December 2015, Cadence had cash of £0.9m. This was after net cash outflows of £1.0m, £6.4m in investments (of which £5.7m relates to payments for available for sale financial assets) and net financing of £5.5m.

Financings comprised £2.3m (net of costs) from the issue of shares, £3.2m in proceeds from its Yorkville equity swap agreement, net borrowings of £1.7m and finance costs of £0.4m.

Post-period, Cadence raised £3.55m via the issue of 645.6m new shares at 0.55p each, primarily to US institutions. Cadence invested a total of £832k into two lithium-focused development companies. This consisted of Cadence increasing its then ownership of EMH from 11.9% to 19.8% at a cost of £670k, and acquiring a then 15.5% stake in MMS for £162k (C$300k at a rate of £0.54/C$).

On 9 August 2016, Cadence also announced that it had successfully issued a US$15m convertible loan note to a strategic Mexican investment fund. The note is convertible into shares of Cadence, at a price of 0.65p, has an expiry date of 12 months from the date of issue and bears interest at a rate of 5%. Cadence can opt, cash permitting, to settle the note at any time prior to maturity. As of 31 January 2017, US$0.95m of the note’s US$15m face value had been converted into equity. Each converted dollar of the principle also carries 40 ordinary share purchase warrants with an exercise price of 0.80p (ie potential dilution of 600m new shares in total).

On the basis of the above financing and investments and our assumption of central costs totalling £2.0m for FY16, we estimate that Cadence had £6.2m in net debt at the end of FY16.

Exhibit 13: Financial summary

£000s

2012

2013

2014

2015

2016e

Year-end December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

Cost of Sales

0

0

0

0

0

Gross Profit

0

0

0

0

0

EBITDA

 

 

(650)

(660)

(1,278)

(1,582)

(2,000)

Operating Profit (before amort. and except.)

(650)

(660)

(1,278)

(1,582)

(2,000)

Intangible Amortisation

(57)

(54)

(49)

(29)

0

Exceptionals

0

0

0

0

0

Share based payments

(82)

(52)

(1,846)

(641)

0

Operating Profit

(789)

(766)

(3,173)

(2,252)

(2,000)

Net Interest

0

0

(361)

(548)

(167)

Share of assocs/jvs gain/(loss)

0

0

(19)

(129)

0

Exceptionals (financial)

(184)

2,213

456

(545)

0

Profit Before Tax (norm)

 

 

(650)

(660)

(1,639)

(2,130)

(2,167)

Profit Before Tax (FRS 3)

 

 

(973)

1,447

(3,078)

(3,345)

(2,167)

Tax

0

0

0

0

0

Profit After Tax (norm)

(650)

(660)

(1,639)

(2,130)

(2,167)

Profit After Tax (FRS 3)

(973)

1,447

(3,078)

(3,345)

(2,167)

Average Number of Shares Outstanding (m)

1,480.2

3,167.7

5,232.1

6,802.8

7,424.4

EPS - normalised (p)

 

 

(0.04)

(0.02)

(0.03)

(0.03)

(0.03)

EPS - normalised and fully diluted (p)

 

(0.04)

(0.02)

(0.03)

(0.03)

(0.03)

EPS - (IFRS) (p)

 

 

(0.07)

0.05

(0.06)

(0.05)

(0.03)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

879

2,194

4,107

4,510

4,510

Intangible Assets

879

698

1,174

1,706

1,706

Tangible Assets

0

0

0

0

0

Investments

0

1,496

2,933

2,804

2,804

Current Assets

 

 

700

2,978

11,529

15,066

27,760

Stocks

0

0

0

0

0

Debtors

489

688

1,047

229

0

Cash

176

961

1,463

893

7,183

Other

35

1,329

9,019

13,944

20,577

Current Liabilities

 

 

(122)

(227)

(1,110)

(2,637)

(13,373)

Creditors

(122)

(227)

(475)

(230)

0

Short term borrowings

0

0

(635)

(2,407)

(13,373)

Long Term Liabilities

 

 

0

0

0

0

0

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

1,457

4,945

14,526

16,939

18,897

CASH FLOW

Operating Cash Flow

 

 

(716)

(804)

(1,389)

(972)

(2,168)

Net Interest

0

0

(342)

(419)

0

Tax

0

0

0

0

0

Capex

0

0

(539)

(635)

0

Acquisitions/disposals

250

(2,364)

(6,036)

(5,743)

(6,633)

Financing

399

3,953

8,126

5,482

4,125

Dividends

0

0

0

0

0

Net Cash Flow

(67)

785

(180)

(2,287)

(4,676)

Opening net debt/(cash)

 

 

(243)

(176)

(961)

(828)

1,514

HP finance leases initiated

0

0

0

0

0

Other

0

0

47

(55)

0

Closing net debt/(cash)

 

 

(176)

(961)

(828)

1,514

6,190

Source: Cadence Minerals accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Cadence Minerals and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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 requiCadenceents designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New York +1 646 653 7026

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Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

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Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Cadence Minerals and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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 requiCadenceents designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney, NSW 2000

Australia

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