Member Info for observer842

Perhaps it's a combination of what we are both thinking @tomcat?

"DEV is engaging principal contractors and expects to be able to start the movement of the material to the public port in July 2020. DEV plans to ship directly to customers via 45,000-tonne bulk carriers at a rate of 2-3 loads every two months, dependent on port berth availability."

i.e. maybe regular (approximately monthly, but perhaps slightly more frequent) repayments to KDNC start in July inline with when DEV receive payments from each bulk carrier loaded/leaving port/material being delivered to port? With this in mind we might expect our first repayment in July, second in August, and third, and potentially fourth, in September?

Ob.

What makes you think the payments are monthly @tomcat? "repayable over four months" doesn't necessarily mean monthly. All we can take from that is that whatever we lend (less than that raised, potentially substantially less) is intended to be repaid within 4 months. Admittedly "over" does feel like it should be spread out in some way, but I suspect not. I think it's more likely once cash for the first shipment is received by DEV we get our loan back plus interest - and this is likely to happen within 4 months of early May. Just IMHO though.

@tomcat Depends on whether the contract is FOB and if so whether it's FOB Destination or FOB Shipping Point.

Lol @tomcat!

Repeat after me @tomcat. Don't feed the trolls.

The research I do mostly isn't about the now, it's about the future what-if scenarios which allow me and other similar investors to react faster than those who haven't done their own research or are just following the herd, allowing continued buying on a rising share price whilst those who don't quite realise the significance of the news sell too strongly into the rise - and then later kick themselves... And of course dump a share if a particularly bad what-if scenario you've researched unfolds.

For instance, let's say BCN announce tomorrow they plan to increase the production of the Sonora project from 35ktpa to 70ktpa by year 4, but give us no more information than that. If you haven't done your own research you perhaps wouldn't realise there is a very strong possibility that it would be KDNC's share price that stood to benefit more so than BCN's from this announcement, potentially spectacularly so. Some might even go as far to suggest that BCN have been delaying for years in the hope to force us out on a cheap sale. Fortunately for us Amapa appears to be coming good, so we might be about to see a shift of tack, perhaps offering a half decent price before announcing their plans to increase. :-)))

It's all conjecture and speculation of course... until it transpires.

Ob.

Combining the last 2 pages of the JRP together and information from the RNS I've arrived at a broad after-tax NPV10 estimate of the Amapa project of around $500m assuming the cash flows in the tables are based on $61/t Fe 62% and $80/t Fe 65% pellet feed, and approximately double this when using the spot of these on the weekend to take the after-tax NPV10 to $1B :-)))

Anyone else want to share their estimates? I won't bother with reams of calculations if we are all in agreement! lol. Obviously if the production rate or the mine life is extended, which both have been hinted at, the NPV increases. It's also likely the strengthening USD to BRL will improve project finances through a reduction in OpEx costs (expressed in USD), and potentially also through reduction in debt (expressed in USD) if some of this is denominated in BRL.

Ob.

@Topstock: "How much did you get paid for that?" Was that aimed at me? If so I presume I'm getting paid the say as everyone else who posts on here. I might have to fire up a law suit if not! ;-)

The answer is 0. Always has been, always will be. I post to help me and others better understand what we are investing in. This is a Strong Buy and I personally rather selfishly hope the share price falls back to recent lows so I can get more for my buck as I continue to buy on the assumption we won't be raising before decent news flow and derisking from various of our projects, Amapa in particular, but potentially also EMH, BCN and HAS, raises the share price significantly into double figures... Sorry @Frankie, but that's the way it is. I don't intend to sell it down though like some might on this conviction. Perhaps I should? Nah, too risky we rocket at this point IMHO.

The EBITDA I estimated at full production rates of $188m appears to be based on a 62% Fe price of $61/t, which appeared to result in an average sale price of our products of $69/t. If we wanted to see what the EBITDA would be using today's spot I think it's a simple matter of adding the additional revenue directly to the EBITDA. At least I can't see why not.

Today's spot according to Custeel:
Seaborne 62% Fe fines = $83.75/t
Seaborne 65% Fe fines = $101.85/t
Seaborne 65% Fe pellets premium = $23.55/t

In the 10 year period 2025-2034 in the JRP the revenues per year are the same:
===[
Spiral Concentrate (62%) R$198m
Pellet Feed (65% Fe) R$1265m
Total Revenue R$1463m
]===

From the RNS the quantities sold are supposedly
===[
4.4 Mt of 65% Fe
0.9 Mt of 62% Fe
]===

If the 62% is sold at $61/t then the BRL to USD in the report can be deduced as:

0.9Mt * 61 * R = $198m
R = 3.6 USD

Using that exchange rate value the price per tonne of pellet feed can be deduced as:

4.4Mt * P * 3.6 = $1265m
P = $80/t

Using today's spot prices the increase to the EBITDA can be estimated as:

0.9Mt * ($83.75/t - $61/t) + 4.4Mt * ($101.85/t + $23.55/t - $80/t)
$20.475m + $199.76m = $220m

The average EBITDA at full production of $188m I estimated in my original post in this thread was based on a USD to BRL of 4. If 3.6 were used this would become $209m using the conservative $61/t. Using today's spot this would increase by the $220m calculated above to $429m :-))))

I'd certainly take that EBITDA of $429m with a large pinch of salt, especially as last time I looked at this there was a question mark over whether the prices should be re-scaled to 100% and whether using the pellet premium was appropriate. In fact it's got me wondering whether the prices in the JRP are based on something other than $61/t 62% Fe as it might explain a few things. lol. DYOR!

Ob.

Interesting thoughts @tomcat. The clause: "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%." does suggest that Indo is on the hook for something. This could either be a cash contribution for its % holding of PBA (as per some scenarios) or, as you point out, transferring the $49.14m debt currently owed from DEV to Indo, to instead be owed from DEV to PBA. Or something else we haven't spotted or can't know at this point.

Perhaps it's both: security relating to the $49.14m; default relating to reneging on their cash injection requirements as part of the JV agreement?

They may also be the off-taker with ulterior motive around this. Sigh.

Ob.

I've just tried downloading the JRP again. Seems to still be working.

https://pje.trt8.jus.br/primeirograu/Processo/ConsultaDocumento/listView.seam
20012416350764800000023996777
Consultar

Assuming Indo own 100% now and 80% when we own 20% I think @Bannor's explanation is the simplest: the JV agreement will include a clause related to transfer of shares in PBA from Indo to KDNC: when the first set of conditions are met PBA receives $2.5m and this is lent to DEV (DIP Finance A) and then another 7% when the second set of conditions are met and we have contributed $3.5m to PBA. When the further $24m is raised, the full $27.5m is then lent to DEV (DIP Finance B).

According to page 36 of the JRP, the Revenue net of shipping and the EBITDA for the project based on $61/t is as follows:

https://pje.trt8.jus.br/primeirograu/Processo/ConsultaDocumento/listView.seam 20012416350764800000023996777
===[
2019: 0 0
2020: R$148 R$115
2021: R$148 R$115
2022: R$386 R$200
2023: R$760 R$502
2024: R$1388 R$938
2025: R$1292 R$832
2026: R$1292 R$816
2027: R$1292 R$800
2028: R$1292 R$783
2029: R$1292 R$765
2030: R$1292 R$749
2031: R$1292 R$727
2032: R$1292 R$707
2033: R$1292 R$688
2034: R$1292 R$665
2035: R$230 R$91
]===

There may be transcription errors - please point them out!

We don't know what BRL:USD they have used, but at last summer it was at or below around 4 and had been for many years. On the date of our announcement on 30 August 2019, the exchange rate was 4.15

It is claimed in the RNS of that date:

"Approval of Judicial Restructuring Plan Paves the way for the Restart of the Amapá Iron Ore Project." (30 August 2019)
http://irservices.netbuilder.com/ir/cadence/newsArticle.php?ST=REM&id=2887382
===[
At full production and using US$61 per tonne of 62% Fe Amapá is forecast to have:
o an average net revenue after shipping of US$266 million per annum,
o and an average EBITDA of US$136 million per annum.
]===

From the above table, I'd say it was fair to use the value of R$1292 in years 2025-2034 for the net revenue after shipping at full production, which expressed in dollars using an exchange rate of 4 is $323m, not $266m. It appears that they have used the average over the years 2022-2035 which is R$1120 and with an exchange rate of 4.15 is $270m

As for the EBITDA, I'd say it is fair to use the same years 2025 to 2034 for full production which averages to: R$753, and using an exchange rate of 4 results in an average EBITDA at full production of $188m 38% higher than that stated in the RNS ($136m). Using the average over the years 2022-2035 results in R$662 which with an exchange rate of 4.15 is $160m, still higher than the reported $136m. Using the average over the years 2019-2035 results in an average of R$558 which using an exchange rate of 4.15 is $134.5m - about right.

So in summary our BoD appear to have inadvertently played down the prospects of the project by stating that the EBITDA of $136m per annum is an average at full production when in fact it appears to be the average over the full 17 years of the project. Using an exchange rate of 4 the peak EBITDA is in year 2024 of $234.5m with a more appropriate "at full production" average of $188m.

I wondered if the disparity might be due to a different price per tonne being used, but the price per tonne in the JRP appears to be: total revenue: R$1463. Divide this by 5.3Mt and 4 gives = $69/t which is about right given most is 65% iron not 62% iron.

By the way, increasing USD to BRL (5.59!) is good for this project, but not relevant for the above.

Thoughts appreciated!

Ob.

I can't argue with that scenario @Bannor! In fact it's gone straight to number 1 in my top ten. :-)

Thanks @Bannor, your clear explanation is much appreciated: the JRP and JV agreement are two separate but connected agreements. In my latest suggestion of Indo owning 25% of PBA when we owned 20% I envisaged the step to take us to 73% and 27% respectively happening simultaneously using the same price per share. I don't think there is any particular reasoning why this has to be in lock-step though - it could occur in two stages as suggested by @tomcat - we contribute $3.5m to take our holding to 27% and some time later $24m is raised by Sino which takes their holding to 73%, or adjusted appropriately if they seek help.

This sequence of events could fit into the RNS if the wording of: "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." is interpreted to mean once we have fully finished investing, and assuming we haven't used our first right of refusal, Sino will own 73% of PBA.

I've taken a look through the RNS and it's reasonably clear when we own 20% and 27%, but only ever spelt out once (above) what Sino will own and when.

By the way, I'm just putting forward the case for the defence of this scenario - it doesn't necessarily mean I'm fully behind it. Personally I still think there is a good chance that in order for us to hold onto our 27% we'll have to contribute to the $24m equity raise or risk being diluted one way or another, and in the light of your research last night it seems that if Sino can't raise the necessary funds, we'll be on the hook: "or not exercise its right of first refusal under the terms of the Agreement".

I was going to end there, but I might have just spotted something when wondering how much we'll be on the hook for:

In this scenario, Sino is expected to invest $24m to take their holding from 25% to 73%. i.e. 48% of the company is up for grabs for $24m. It's interesting to note because of "or not exercise its right of first refusal" we would be on the hook for approximately half of this $24m (22.9% = $11.45) if Sino couldn't, or didn't want to fund it. In fact it wouldn't surprise me if the agreement and calculations are such that when we own 27% of PBA, Sino own 27% too - meaning we'd both be equally on the hook for $12m each, with Sino (effectively) having a first right of refusal over ours.

Even after the events I wonder if we'll ever know...? LoL.

Ob.

Some good points @Bannor! Especially "or not exercise its right of first refusal under the terms of the Agreement". I take your point about the timelines, though uncharacteristically unlike you, you realise you are putting more faith in the BoD and their latest corporate presentation than the JRP which indicates the $27.5m is due on completion of the second set of prerequisites - which we are currently interpreting as our $3.5m plus the $24m equity on page 15 of the presentation? As you are, @tomcat too envisages these as being separated in time: DIP Finance B(1) - $3.5m and DIP Finance B(2) - $24m, which would fit closer with the corporate presentation but might require us to contribute funds if we wanted to hold onto 27% if percentage ownerships changed at DIPB1 then DIPB2. Whereas my latest scenario sees both these happening pretty much at the same time from the point of view of both the JV and JRP, but in practice we'd likely raise our $3.5m first, followed some time later by Indo raising their $24m (with our first right of refusal to perhaps mandatory take us to 49.9% if Sino requires it), perhaps by several months as indicated in the corporate presentation. But from the point of view of the JRP and % ownerships this would be a simultaneous transaction.

Assuming the BoD aren't trying to be economical with the truth for whatever reason (e.g., for their own benefit or for the benefit of the company), I suspect they've tried to simplify the explanation of the JV and key aspects of the JRP to shareholders, but have only ended up confusing! I wonder if we'll ever get to see the JV agreement? I suspect not.

Some good chat today - unless anyone has further revelations perhaps I can move on to that EBITDA underestimate tomorrow...? :-)

Ob.

I love the thought that while we are struggling to figure out the answer, @Frankie already knows as she's simply asked @Kiran. ;-)

Obviously if it's stated anywhere credible that when we own 20%, Indo owns 80% the idea falls flat on its face. lol!

Indeed @tomcat. Previously I was more fond of the idea of issuing new shares, but the idea of using escrow/treasury shares seemed to fit better and simpler with this new way of thinking (Indo 25%, KDNC 20% @ DIP Finance A). Are you coming round to the possibility of this?

It also removes the necessity for us to contribute any more than $3.5m for us to maintain at least 27% of PBA. Interestingly, all of the DIP financing is returned early on (table 3 of the JRP). i.e DIP A + B is loaned from PBA to DEV, and returned within 5-6 years or so.

As to whether I actually believe this is the one? Probably not. lol.