[Amapa Project Processing Plant. Source: Cadence Minerals]
Cadence Minerals (KDNC ) announced interim results for the 6 months ended 30 June 2022 (1H22).
Operational highlights
Cadence successfully vested its 20% in the Amapa Iron Ore Project, Brazil in February. Subsequently, the company increased its stake to 27% in March, with a consideration for the additional 7% of US$3.5m. Cadence used the funding to advance the project's pre-feasibility study (PFS). Cadence expects to publish an updated Mineral Resource Estimate (MRE), followed by an Ore Reserve Estimate (ORE), and finally the PFS, in 4Q 2022.
Cadence sold two assets during the period: First, its 31.5% interest in Lithium Technology Pty (LT) and Lithium Supplies Pty (LS) was sold to Evergreen Lithium. Second, its 30% interest in the Yangibana Rare Earth Project was sold to project operator and owner Hastings Technology Metals. In both cases, Cadence agreed to vend the assets for equity in companies that are either listed or expected to be listed. Cadence had invested c. £1.7m in the assets and received equity valued at £5.5m, representing a 321% cumulative return.
Cadence noted that the sale of Yangibana is not reflected in its 1H results as it is not yet completed. The company expects both the Yangibana transaction and the IPO of Evergreen Lithium to complete this year, potentially increasing returns.
Project Highlights
Amapa Iron Ore Project, Brazil (27% interest)
In 2019, Cadence entered into an agreement to acquire up to 27% of Amapa. The company invested US$6m over 2 stages of a JV company. The first stage was for 20% of the JV at a consideration of US$2.5m. The second stage was for a further 7% at a consideration of US$3.5m, completed in March 2022.
During 1H22, Cadence's two key operational priorities at Amapa were, first, to progress the permitting pathway, including regularisation of mining concessions, tailing storage facilities, and environmental permits. And second, to advance the PFS, commenced in 2021 and expected in 4Q 2022 following publication of an updated MRE and ORE in October 2022.
The PFS is based on producing 5.3 Mt of iron ore concentrate per year. The PFS, once complete, will outline more fully the company's development timelines and capital requirements.
Evergreen Lithium Limited, Australia (13.6% interest)
During the period, Cadence completed the sale of 100% of aforementioned LT and LS to Evergreen Lithium. Cadence will receive up to A$6.63m (£4.02m) for the assets. The initial consideration paid is A$3.16m (£1.92m) in Evergreen shares, representing 13.16% of Evergreen. An additional AS$3.47m (£2.10m) will be paid, subject to performance milestones.
The initial consideration represents a 159% ROI for Cadence. The additional £2.1m will increase the ROI to 395%.
As a result of the acquisition, Evergreen holds two exploration licenses in Australia's Northern Territory. LT and LS further hold seven exploration license applications in Argentina. All licenses and applications target hard rock lithium deposits, the most significant being the Litchfield lithium prospect where Evergreen has committed to spending A$4m.
Yangibana Project, Australia (30% interest)
Yangibana is a significant rare earths project, containing substantial Neodymium and Praseodymium resources. Cadence holds a 30% interest in 3 mining licenses and 6 exploration licenses, containing 0.7m tonnes of ore reserves.
In June 2022, Cadence agreed to sell its working interest in Yangibana to Hasting Technology Metals, the project's current operator and owner. The interests will be sold for A$9m (£5.45m), to be settled by issue of equity in Hastings for a price to be determined based on 30 days VWAP before completion, set at 6 months from the date of signing.
Subject to completion of the sale, Cadence will receive £5.45m, representing a 502% ROI.
Hasting has a market cap of c. A$415m and estimated NPV of A$1bn. In February, the Australian Government's Northern Australia Infrastructure Facility (NAIF) approved a A$140m loan facility to Hastings and Yangibana, making it the first Australian rare earth project to receive NAIF funding.
Hastings has commenced site construction and is planning to begin commissioning of the plant in late 2023, delivering maiden production to key customers in 2024.
Sonora Lithium Project Mexico (30% interest)
Cadence holds 30% interest in the Sonora Lithium Project, one of the world's largest lithium deposits, via its 30% stake in the JV interests of Mexalit SA and Megalit SA.
A feasibility study was published in January 2018. The report estimated a pre-tax project NPV of US$1.253bn at an 8% discount rate, an Internal Rate of Return of 26.1%, and Life of Mine operating costs of US$3,910/t of lithium carbonate. It should be noted that under the published feasibility study, the concession owned by Mexalit will be mined starting in year 9 of the mine plan, ceasing at the end of the mine life in year 19.
Financial Performance
Cadence's total assets decreased slightly to £23.01m to £21.93m. During the period, the company's net cash outflow was £1.65m, gross proceeds of £4.9m were raised through the issue of new shares, and its net cash position ended the period at £1.99m, up £1.66m from the year prior.
During the period, Cadence's equity portfolio generated a realised gain of £1.11m, primarily from the sale of European Metal Holdings shares. The total ROI for the Cadence equity portfolio as of 28 September 2022 was 407% or £9.95m.
In 1H22, Cadence made a pre-tax loss of £5.05m, representing a loss per share of 3.136p. However, in 2H 2022 the company expects its results to reflect the approximately £4.2m of profit made from the sale of its Yangibana JV interest.
View from Vox
Cadence achieved three important milestones during the period. It vested 27% interest in the valuable Amapa Iron Ore Project, it progressed development of Amapa and its pre-feasibility study, and created capital growth in its private investments via sales of LT, LS, and Yangibana. The sales represent a potential 395% and 502% ROI respectively. The upcoming IPO of Evergreen Lithium represents further potential value.
Despite challenging macroeconomic conditions, the lithium and rare earth sectors have remained positive, with pricing in both remaining robust. Demand continues to be driven by electrification of transport and the continued undersupply of feedstock. Cadence does not believe an oversupply of lithium is imminent, but sees a continued market deficit.
The global slowdown has had an impact on iron ore with the Platts index dropping from US$125/dmt to US$100/dmt in 1H22. Prospects for iron ore are driven by China, being the world's largest steel producer, and buyer of 70% of global seaborne iron ore. Cadence expects China to emerge as a source of stability for iron ore demand, with recent indications pointing to a recovery in its growth momentum.
Cadence says it remains "cautiously optimistic" despite macroeconomic headwinds. The transition to net zero carbon emissions should continue to open up investment opportunities in companies that serve the associated supply chains.
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