07/08/2023

Introduction:

With its flagship iron ore project of Amapa, it could be said that for most companies settling with this would be enough to provide an opportunity for investors looking for exceptional returns. However, KDNC is also very much focused on commodities and chemicals that will provide the transition to electrification and to Net Zero a net zero world as well as those that we still use currently. Key to the transition to Net Zero is lithium and rare earth metals. The company therefore has invested in opportunities varying from those in which it has a direct role, to those in which it is a passive investor. Its goal is to produce a 300% to 400% return over the whole portfolio, through both public and private companies. £9.9m of unrealised portfolio value so far represents a 330% return to date. This compares to a £15m market cap.

Key Assets:

European Metals Holdings

European Metals Cinovec project represents the largest lithium hard rock lithium deposit in Europe. It is strategically located in the Czech Republic. KDNC became involved at 12p a share and its returns on that asset today have been around 260% to date. The company invested initially at the PFS stage when the valuation was around $1.94bn. The project is now at the DFS stage. When up and running it will allow the massive central European based manufacturing / industrial companies to have a local source of lithium carbonate. KDNC’s stake in EMH is currently worth £5.8m.

Hastings Technology Minerals

KDNC initially had 1.9% stake in Hastings, bought for £900,000, when it was a private company. This was converted into £5.1m worth of shares in the listed company which is a substantial rare earths asset in Australia. The last published NPV was A$1bn, which is expected to increase as the company goes into production in 2025, following the DFS. The current value of Hastings on KDNC’s books is £1.5m, so once again a decent return on the original £900,000.

Evergreen Lithium

Evergreen can be said to be analogous to EMH in the sense that it is an early exploration project, the main asset of hard rock lithium is in Northern Territory, Australia. This private company has been spun into a public one. KDNC has 8.7% of the company, which has already delivered a 200% return on the basis of a current £2.5m. Depending on the performance / target of Evergreen, KDNC will receive a further A$3.4m worth of shares.

Sonora

This is an asset that was originally Bacanora Lithium, subsequently bought out by Gang Feng. KDNC retained part of the license, of which it has 30%. The NPV of the DFS here is $800m, with the production target around 35,000 per annum. From years 8 to 19 some 72,000 tonnes would be mined. KDNC’s exit strategy would be a public listing, and it is currently valued at cost.

Amapa

Amapa is not only an iron ore mine (formerly producing), the company has concessions for a 196km railway, and a port. Owning and operating the mine and infrastructure means that the cost to Cadence will be that much lower than other producers. Amapa was producing 6m tonnes per annum by 2012 under Anglo American. After a port failure at the project Cadence took ownership running up to a maximum of 49% on an asset with a $949m NPV in a 50/50 JV with its partner.  The estimated capex is $400m with an IRR of 34%. 5.2m tonnes a year are expected to be delivered, on a project which cost KDNC $9m. Since the PFS, the focus is on continuing to add further value to the asset, addressing environmental aspects, and increasing the resource size and grade. All of this is ahead of the DFS, which is expected to be a faster process that is usual.

What is key going forward for KDNC is that while it is normal for a company to raise money from shareholders between PFS and DFS, current market conditions seem to be against this strategy. This leaves Cadence with three main options regarding Amapa, while its other investments mature. The first and the company’s preferred option is to get a strategic investor in at the asset level. The second option would be to sell out to a buyer of the project and return the proceeds to shareholders. The third option would be to look for a more sympathetic market than London, say the ASX, to list Amapa and extract the value of the project in this way.

Conclusion:

As things stand KDNC including Amapa has a book value of £42m versus the current market cap of £15m. In an ideal world the UK market would return the shares to 20p plus and allow new funding to be delivered for Amapa. However, it may be that an option such as listing on the Australian market, arguably the home of iron ore, would be a better, non-dilutive route, other than Amapa just being bought out.

However, the KDNC journey pans out, its star asset Amapa certainly gives it optionality, just as those who are looking at the stock now at 8p may feel that the valuation does not represent the many positive kickers in place as far as the fundamentals of the company are concerned. Indeed, in the case of European Metals and Hastings investments, KDNC has already proved its model of identifying  3x / 4x returns.