Photo of the Amapa Mine courtesy of the Cadence web site.
Splitting out the public and private elements of KDNC and following some (further) price drops where are we?
(all valuations as at 25th Aug 2023)
(Total shares in issue are 180,970,000)
The market cap of KDNC is £12.85m
PUBLIC HOLDINGS
a/ EMH 6.5% holding worth £4.94m/2.73p (6.5% @ US$1.2bn NPV is £61.42m or 33.94p/per KDNC share).
b/ EG1 8.7% holding worth £2.1m/1.16p (8.7% @ £570m NPV is £49.59m or 27.4p/per KDNC share).
c/ HAS 1.9% holding worth £1.22m/0.67p (1.9% @ A$1bn NPV is worth £10m or 5.52p/per KDNC share)
Total £8.26m or 4.56p/per KDNC share. (or 66.9p per KDNC share at their NPV)
So current market prices are on a 93.2% discount to their NPVs (But see note 5 below).
PRIVATE HOLDINGS
Sonora is worth ? (NPV Base case is £7m, NPV is £23m)
Amapa is worth ? (NPV Base case is £253m, based on 33% @ unrisked $949m NPV)
The 2 private assets marked "?" are in the price for £4.6m or 2.54p share. (But are £1.53/KDNC share at their NPV)
So £4.6m for £260m is on a 98.2% discount to their NPVs.
Are there other upsides?
1. Amapa iron ore reserves. Nearby "Great Panther" areas could contain further orebodies. A doubling of ore is not impossible. 50-100p?/KDNC share.
2. KDNC has the opportunity to increase its holding to 49% although I’m not clear on what terms/cost the final 16% would cost. Presumably at a level less than 16% of $949m – which would make the increased holding accretive to KDNC.
3. There are gold mines and other activities around Amapa. What earnings are possible from the company owned railway and port? Possibly 5-10p?/KDNC share.
4. Is a 94.2% discount for HAS is unfair? HAS is 18 months from 1st pour and 2 years from cashflow positive - that £10m NPV value seems fairly nailed on judging by their recent presentation: (Source: https://www.investi.com.au/api/announcements/has/84c09d44-461.pdf)
That’s worth 4.85p/KDNC share.
4. The NPVs are at conservative commodity price estimates. For example EMH's PFS put Lithium Hydroxide at US$10,000/tonne and Carbonate at $12,000/tonne. As at 27th August Lithium Carbonate is $30k/tonne (2.4X the selling price would magnify returns by 5X or more). The NPV could be +50p/share.
5. EMH has its DFS and FID in Q4 2023. It has backing from both CEZ and the EBRD. What level of risk should still apply to EMH? Currently 2.73p vs 33.94p is a 92% discount to NPV.
6. EMH simplified flowsheet WHI said "At the full 20% reduction, this increases our NPV10 for the project as envisaged currently by EMH of $149m to $1,217m using our new long-term lithium carbonate price of $15,000/t, and by $300m to $3,655m for our expanded case (whereby EMH doubles production from year 6)." That would imply a 6.5% of EMH @ US$3.6bn NPV x 49% is worth £90.25m/49.88p or an extra 15.94p a share.
7. What premium value is there for safe jurisdiction assets? Who controls 80% of lithium refining and battery production. Not the West. Where's EMH located? The West. A few dozen miles from Bavaria's and Czechia's EV production. Similar story with HAS. Who controls rare earths? Over 85% China. Where's HAS located? The West (Australia is considered the West). EG1 is there too. Sonora is proximate to US/Mexican EV production. Given the geopolitical tensions assets in friendly jurisdictions usually come at a premium – and not at a 98% discount.
8. EG1 – there's a further A$3.47m of shares due to KDNC on completion of certain performance milestones. Assuming this occurs this would have the effect of diluting existing EG1 shareholders by 24.6% and would increase KDNC's holding from 8.7% to 33.3%. EG1 is a A$46.17m market cap so a third would be worth £7.77m (£5.67m more).... at today's prices. Going back to the NPV of £570m that's 33% would be worth £188.1m – or an increase from £0.27 to £1.04/per KDNC share.
Conclusions:
1. HAS is far further advanced than perhaps people realise, with strong offtake counterparties, finance, and expansion plans for downstream processing in Estonia. Rare earths are strategically important. EMH isn't so far behind. Lithium is strategically important.
2. Even considering risk, and ignoring any upside to publicly listed holdings upsides, the 98.2%+ discount on Amapa/Sonora makes no sense.
3. Including all upsides I arrive at:
Public NPVs £0.67/share
Private NPVs £1.53/share
Upsides £2.50+/share
Or £4.70+/share so a 98.51% discount to a 7.2p share.