No question that there’s big value on offer at Cadence Minerals’ (KDNC) Amapa iron ore project in Brazil. 

When the company optimized a pre-feasibility study on Amapa last year, the post-tax net present value was set at well over US$1.9 bn. 

What’s more, because it’s a brownfield site, capital costs are likely to be much lower than you’d expect from something completely new.  

The study also projected operating costs to be approximately US$34 per tonne FOB. So, with the DR Grade iron ore price currently at well over US$130, margins also appear very healthy.

Cadence only owns a 35% stake in Amapa, mind, so not all of the value will come its way. 

But even so, there does seem to be something of a disparity between the US$1.9 bn asset that Cadence has been steadily moving forward, and the £7 million valuation that the market currently attributes to the company.

Especially when you consider that Cadence’s investment in Amapa itself amounts to more than US$15 million.

But the mining markets are fickle. 

It looks like we’re just coming out of a prolonged bear market, and valuations across the board may start looking a bit more realistic as summer turns to autumn.

For Cadence, though, when the market does finally wake up to the true value of Amapa, it won’t just be a case of the company rising with all the other boats. The re-rating is likely to be far more substantial than that.

After all, once fully operational, Amapa will be the largest employer in the state of Amapa and is likely to boost the state's GDP by between 4% and 10%.

It will produce over 5.8 million wet metric tonnes of high-grade iron ore per year, and depending on the iron ore price, hundreds of millions of dollars in cash flow.

Not that that’s going to happen overnight.

Instead, as Chief executive Kiran Morzaria explains, a smaller-scale, high-grade operation is planned first, and this is likely to generate between US$6 million and US$9 million in annual free cash flow.

It’s in this fashion that he hopes to bridge the valuation gulf between reality and expectation.

This initial smaller-scale operation will be based around an area of high-grade float material storage. From this material, it’s thought that an upgrade to an existing plant can produce a 65% iron pellet product. 

Morzaria is currently deep into discussions about securing the funding to get this plant refurbished, and although he’s not specific about the form the funding will take, it will likely have a substantial off-take component to it, and to involve minimal dilution to Cadence. 

 All told, this smaller-scale part of Amapa could be up and running within 12 months, producing around 400,000 tonnes per year of 65% iron ore product at a US$24 margin.

Recoveries won’t be too complicated, since the material has already been partly processed, and will be separated via magnetic separators and spirals.

But we’re not there yet.

“Our real drive is to get the financing done by September,” adds Morzaria. “We’re advancing well and circulating term sheets.”

If Cadence can get this smaller project going it will build credibility when it comes to getting the larger operation into production. 

“It shows locally and more broadly that we can execute,” says Morzaria. 

“This is an interim solution to show cashflow and show operations and demonstrate that Amapa is a place you can invest in and take things forwards."

And, in due course, the money generated by the smaller-scale project could be allocated towards detailed engineering studies for the larger project, while they continue to work on securing a trade partner to provide the necessary balance sheet to develop the larger project.

That would certainly be a sensible and straightforward way forward, and one which the Cadence team now looks well set up to start delivering.