LSE:KDNC - Cadence Minerals - Undervalued Lithium and EV Metals investment company with transformative deal news due soon

Outlining the multi-bagger potential for Cadence Minerals (undervalued EV Metals and Lithium play with transformative Iron Ore project deal)

AIM listed Cadence Minerals is an investment company that has public and private investments in Lithium, Rare earth metals and Iron ore - I believe the market has undervalued this company due to past performance associated with the prior lithium boom and bust cycle. Over half of its market cap is covered by public equities and cash, has no debt and the huge potential value of its private assets are not priced in.

Company Details

Company Presentation (June 2021)

Company Website

Annual Report

Interim Report

Ticker: KDNC (AIM Listed)

CEO: Kiran Morzaria

Market Cap: £25m

Share Price: 17p

Shares Outstanding: 148.65m Yahoo Finance

Short term target: 45p (164%)

Long term target: 120p (600%)

Directors ownership: 1.82% (2.7m shares) Company Website

Directors options at 29p (7.2m shares) Announcement

P/E: 2.17

Amapa Iron Ore Mine (Deal pending to take 27% ownership worth £130m+)

The company is awaiting a bank creditor agreement to take 27% ownership of an Iron Ore mine in Brazil (including private port and railway) for just $6m. This was formerly owned by Anglo American with an impaired valuation in the region of $660m (£485m) and previously valued when fully operating at $1.2bn. Cadence has already funded $2.5m which is held in escrow ready to take a 20% stake (stage 1). The mine is going through a judicial recovery after going bankrupt due to a port collapse. Cadence Minerals have agreed a deal with creditors to bring the mine back to operations along side joint venture partner Indo Sino Trade (a Singapore based company). This deal would be transformative for the company as outlined in their annual report. The CEO is highly confident the deal will be completed however the market doesn’t appear to appreciate the significance of the opportunity and some impatience has crept in due to the time it has taken for the banks to get the required approvals. The mine, port and railway requires refurbishment but has approximately 1.3m tonnes of Iron ore stockpiles that can be sold to partially fund the refurbishment. Cadence has the first right of refusal to take 49% ownership of the mine if the JV partner seeks further investment.

In the mean-time the courts in Brazil have stated that the banks cannot be allowed to prevent the refurbishment and recovery of the mine and have allowed the mine’s operating company “Dev Mineração” to sell up to $20m in stockpiles (almost $10m shipped so far) and refurbishment work has already started this has included recruitment of key posts. Glencore were the buyers of the initial shipments of ore which was shipped to China and they had previously made a bid to buy the mine. The labour force in Brazil is very low cost and even lower recently due to the BRL exchange rate. The mine is also able to produce high grades of ore which attract a premium and are lower CO2 when smelted.

Reuters: " Anglo said in its 2011 annual report that Amapa was expected to produce 5.5 million tonnes of iron ore this year. It contributed $120 million of Anglo’s operating profit in 2011, more than twice that generated by Anglo’s nickel division. "

The CEO is “highly confident” that the deal with the banks will be done and is also a Portuguese speaker (Brazil speaks Portuguese). The CEO has just quarantined for two weeks to head out to Brazil to work on the project and gave an interview prior to heading out there.

More details can be found in the Company Announcement on the Amapa project deal and on the company website.

Sonora Lithium Project (Ganfeng a multi-billion lithium major buying Bacanora Lithium for £285m)

Cadence Minerals has 30% ownership of part of the Sonora Lithium project in Mexico. Ganfeng are currently undertaking a buyout of Bacanora Lithium (LSE:BCN) which held 50% of the initial tenements to be mined (Named La Ventana 1 and 2). Cadence owns 30% of the “El Sauz, El Sauz 1, El Sauz 2, Fleur and Fleur 1 concessions” which are due to be mined from year 9 of the 19 year plan with a total of 12% of the mining from this area. Given the lithium price boom it is likely that Ganfeng will want to accelerate the project and increase the production rates shortening this timeline. In my view it is highly likely that once the Bacanora Lithium deal closes Ganfeng will want to buy the 30% Cadence owns soon after to take 100% of the project. This likelihood has been further enhanced by the recent news that Mexico will no longer allow private companies to be granted lithium mining leases this is not expected to affect the Sonora project giving it an almost monopoly status among private lithium projects there and increasing its value. It is unclear exactly how much Ganfeng would be willing to pay for this asset but my personal bare minimum estimate is at least £20m but probably a lot more (almost the entire market cap of Cadence).

Sonora Project Details

https://www.mining.com/bacanora-lithium-accepts-ganfengs-391-million-takeover-offer/

Yangibana Project - Australian rare earth project

Cadence owns 30% of some tenements in joint venture with Hastings Technology Metals (ASX:HAS) - this is a Rare Earth Metals project and a critical resource for the EV boom as the magnets go in to electric motors. The Yangibana project is funded and due to begin construction but it is currently unclear when the areas that Cadence own will be mined. This makes it difficult to value, Hastings have a market cap of AU $400m (£213m) so I give a bare minimum value of around £5m for this asset other company research reports have valued this higher.

Yangibana Project Details

Australian Lithium Project (Lithium Technologies / Lithium Supplies Option deal with Castillo Copper)

Cadence owns 29% of a Lithium exploration company in Australia, it has recently announced a deal with Castillo Copper to transfer ownership for equity which is worth between £153k and £461k of Castillo Copper shares (LSE:CCZ) dependant on drilling results and the option being taken by Castillo.

Company Investments (as per Interim Report 30/6/21)

Company Ticker Ownership Qty Share Price Value
European Metals Holdings ASX:EMH LSE:EMH NASDAQ: ERPNF OTC: EMHLF NASDAQ: EMHYY ~9.9% Owner Source RNS 17,463,864 72p £12.57m (05/10/21)
Macarthur Minerals TSX-V: MMS ASX: MIO OTCQB: MMSDF ~1% ownership N/K AUD $0.44 £337k (30/6/21)
Celsius Resources ASX: CLA £103k (30/6/21)
Eagle Mountain Mining ASX: EM2 £153k (30/6/21)
Charger Metals ASX: CHR now 2.97% ownership £109k (30/6/21)
Total - - - - ~ £13.27m

My short term price target of 45p is based on the market realising the potential of the assets and applying a 50% risk factor on the deal, the long term target of 120p is based on the value of the Amapa Mine deal once announced as it moves towards production.

The equity portfolio limits the downside risk and the upside potential is massive.

If you are interested in following company news and updates they are available on the Cadence Minerals Subreddit r/CadenceMinerals.

Disclaimer: I own shares in the company, please do your own research.

5 Likes

Thank you for sharing this, I was not aware of this company :slight_smile: .

Your post and the investor presentation are quite interesting, I’ll try and have a more in-depth look into the reports, announcements, market etc at some point.

No problem, the CEO is currently in Brazil working on the engineering and refurbishment of the mine/port. There was an interview with him yesterday for the latest update.

Part 1 of the news I mentioned… hope some of you bought in!
http://irservices.netbuilder.com/ir/cadence/newsArticle.php?ST=REM&id=311428213012811598

Monday 11th October 2021

Cadence Minerals (AIM/AQX: KDNC; OTC: KDNCY) is pleased to announce that it has received confirmation from the secured bank creditors that they have obtained approval from their credit committees with respect to the proposed terms of the settlement agreement (“Approval”).

Highlights:

  • Bank credit committee approval for secured bank creditors assits in paving the way for Cadence to vest initial 20% in the Amapa Iron Ore Project
  • On the effective date of the settlement agreement Cadence’s and Indo Sino’s joint venture company will own 99.9% of the Amapa Project
  • The Amapa Iron Ore Project consists of an integrated mine, processing plant, railway, and privately owned port. It was previously owned by Anglo American and produced 6.1 million tonnes of iron ore per annum, and was valued at US$ 660 million.
  • The current Mineral Resource of the Amapa Project consists of 7 million tonnes grading 39.7% Fe in the Indicated category and 8.7Mt at 36.9% Fe in the Inferred catergory

The Approval is subject to the completion of KYC (know your client) and the finalisation of the documentation reflecting the agreement in principle as announced on the 2 September 2020). The Approval assists in paving the way for Cadence to vest its initial 20% indirect interest in Amapa Iron Project (“The Amapa Project”). The Amapa Project consists of an integrated mine, processing plant, railway, and privately owned port. It was previously owned by Anglo American and produced 6.1 million tonnes of iron ore[1] per annum, and was valued by Anglo American at US$ 660 million[2].

While awaiting credit committee approval, the drafting of the final settlement documents have continued to progress. On the effective date of the Settlement Agreement and under the Judicial Restructuring Plan (“JRP”) Cadence and Indo Sino Trade Pte Ltd (Indo Sino), via their joint venture company, will own 99.9% of DEV Mineração S.A., the owner of the Amapa Project.

Cadence Non-Executive Chairman, Andrew Suckling, commented; “As I have said previously, in my time working with commodity projects around the world, I have rarely if ever seen a lapsed mining project with this sort of potential. Today’s announcement is a landmark for Amapa, both in terms of certainty for DEV employees, the wider Amapa community and for Cadence shareholders. I know how hard the team on the ground there have worked to make this happen, and on behalf of our board I would like to express our thanks and gratitude to DEV, the Government of Amapa, the team of local Government officers and bank committees and administrators for contributing to this momentous step in our history.”

“In its previous life, Amapá’s output contributed significantly to the regional economy. Once again it is set to create new opportunities for the community, and will help to improve prospects in employment, health and education for this region in Brazil as the world emerges from the COVID crisis.”

Cadence CEO, Kiran Morzaria, commented: “After a long and protracted process, I am delighted to be able to announce to you that we have now received Credit Committee Approval for the secured bank creditors to execute the Settlement Agreement. Cadence can then vest its initial 20% and eventually a further 7%, which in practical terms means we have a clear path and process to get Amapárecommissioned, licensed and back into production.”

“On my arrival at Amapá last week, I was deeply impressed by the rapid progress made by the DEV team, with reconstruction of some of the administrative and community infrastructure already well advanced. We look forward to working alongside both DEV and Indo Sino to continue to develop this asset, creating further opportunity and prosperity for the Amapa region, and of course delivering ongoing value for all stakeholders.”

About the Amapa Project

The Amapa Project commenced operations in December 2007 with the first production of iron ore concentrate product of 712 kt in 2008. In 2008 Anglo American (70%) and Cliffs (30%) acquired the Amapa Project in 2008 as part of a larger package of mining assets in Brazil.

Cadence updated the Mineral Resource Estimate on 2 November 2020. Increasing the MRE by 21%. The current MRE contains an Mineral Resource 176.7 million tonnes grading 39.7% Fe in the Indicated category and Mineral Resource of 8.7Mt at 36.9% in the Inferred category, both reported within an optimised pit shell and using a cut-off grade of 25% Fe.

Production steadily increased to 4.8 Mt and 6.1 Mt of iron ore concentrate product in 2011 and 2012. During this period, Anglo American reported operating profits from their 70% ownership in the Amapa Project of USD 120 million (100% USD 171 million) and USD 54 million (100% USD 77 million).

Before its sale in 2012, Anglo American valued its 70% stake in Amapa Project at USD 866 million (100% 1.2 billion). It impaired the asset in its 2012 Annual Accounts to USD 462 million (100% USD 660 million.

DEV filed for judicial protection in August 2015 in Brazil, and mining ceased at the Amapa Project. A judicial order in early 2019 offered investors and creditors the opportunity to file a revised JRP. Cadence and Indo Sino filed a conditional JRP, which creditors approved in August 2019. Cadence, Indo Sino and DEV have continued to develop the Amapa Project and satisfy the conditions of the JRP.

Details of the Joint Venture Agreement

The agreement with our joint venture partner, Indo Sino, is to invest in and acquire up to a 27% of a joint venture company Pedra Branca Alliance Pte. Ltd. (“JV Co”). On Completion and registration of the Settlement Agreement the equity of DEV Mineração S.A. (“DEV”) will be transferred to the JV Co, at which point it will own 99.9% of the Amapa Project. Should Indo Sino seek further investors or an investment in the JV Co the agreement also provides Cadence with a first right of refusal to increase its stake to 49% in the JV Co.

To acquire its 27% interest Cadence will invest US$ 6 million over two stages in JV Co. The first stage is for 20% of the JV Co the consideration for which is US$2.5 million. The second stage of investment is for a further 7% of JV Co for a consideration of US$3.5 million. If Cadence is unable to complete the second stage of the investment or not exercise its right of first refusal under the terms of the Agreement, Indo Sino will have a twelve-month option to buy the shares in JV Co held by Cadence for 1.5 (1 ½) times the price paid by Cadence for such shares.

Cadence’s investment is conditional on several material preconditions, which include the grant of key operating licences and the release of bank securities over the asset. On completion of Cadence’s investment (not including the first right of refusal), our joint venture partner Indo Sino will own 73% of JV Co. The Agreement also contains security and default clauses which if triggered causes an upwards adjustment mechanism to allow Cadence to either receive cash from JV Co or receive additional shares in JV Co. In the latter case, Cadence’s shareholding in the JV Co will not go above 49.9%.

On completion of the US$ 6 million investment, Cadence will have the right to appoint two members to a five-member board, with the remaining three comprising of one member jointly appointed by Cadence and Indo Sino and two appointed by Indo Sino.

[1] Anglo American, Annual Report 2012, page 89, https://www.angloamerican.com/~/media/Files/A/Anglo-American-Group/PLC/investors/annual-reporting/2013/annual-report2012.pdf

[2] Anglo American, Annual Report 2012, page 183, https://www.angloamerican.com/~/media/Files/A/Anglo-American-Group/PLC/investors/annual-reporting/2013/annual-report2012.pdf