Member Info for observer842

Your guess is as good as mine @mac. Too many unknowns, and I'm not sure I'd place too much trust in a (translated!) journalistic article of this nature. For instance is that 85m USD or Brazilian Real? And is it really KDNC that's paying it or the JV company? And is it even really in addition to the $115m for the CapEx? I suspect it's payment for the CapEx and it's all in USD as 85 + 27.5 = $112.5m which is approximately equal to the CapEx requirements - assuming $60m from shipped iron ore stockpiles.

But I know some on here like a bit of speculation now and again (as do I!), so let's say it's 85m + 27.5m Brazilian Real to be raised by KDNC. This is £22.5m, call it £25m. We know the BoD are asking us for permission to place around half of the shares in issue at next Friday's AGM. Therefore if we want to raise the £25m by equity alone it might follow that they are anticipating being able to do so at an effective market cap of around £50m. i.e. at a placing price of around 0.5p.

I don't believe the above speculation for one minute, but it serves as a useful what-if thought experiment I suppose.

Ob.

Here is an approximate repayment schedule which results in NPV0 = $225m and NPV10 = $105.73.

"Net Present Value (NPV)"
https://www.calculatorsoup.com/calculators/financial/net-present-value-calculator.php
===[
Interest rate 10%
Compounding 1
Cash Flows at End
Number of lines 6
0 1 @0
1 4 @0
2 2 @$40m
3 2 @$30m
4 2 @$20m
5 2 @$10m
6 5 @$5m
]===

That's 13 years of payments. Last weekend, because I didn't have anything else to go on, I estimated equal payments of $22m a year:

"Net Present Value (NPV)"
https://www.calculatorsoup.com/calculators/financial/net-present-value-calculator.php
===[
Interest rate 10%
Compounding 1
Cash Flows at End
Number of lines 5
0 1 -6 (Initial investment by KDNC to unlock the project)
1 1 30.00 (Shipped ore in 2020)
2 1 -138.30 (CapEx of $168.30m minus shipped ore $30m in 2021)
3 1 50.00 (Estimate of first production in 2022)
4 1 86.00 (Estimate of ramping up production in 2023 - total of this year and last year estimated to be equivalent to a full year)
5 13 114 (13 years of full production in 2024 to 2036 of EBITDA $136m - $22m debt)
NPV = $556.37m
]===

Updating that estimate with the new payment schedule:

"Net Present Value (NPV)"
https://www.calculatorsoup.com/calculators/financial/net-present-value-calculator.php
===[
Interest rate 10%
Compounding 1
Cash Flows at End
Number of lines 9
0 1 -6 (Initial investment by KDNC to unlock the project)
1 1 30.00 (Shipped ore in 2020)
2 1 -138.30 (CapEx of $168.30m minus shipped ore $30m in 2021)
3 1 50.00 (Estimate of first production in 2022)
4 1 86.00 (Estimate of ramping up production in 2023 - total of this year and last year estimated to be equivalent to a full year)
5 2 96 ( 2 years of full production in 2024 and 2025 of EBITDA $136m - $40m debt repayment)
6 2 106
7 2 116
8 2 126
9 5 131
NPV = $557.38m
]===

Varying the discount rate. Old (13 payments of $22m each)

===[
NPV12 = $466.16m
NPP10 = $556.37m (for reference)
NPV8 = $668.40m
NPV5 = $892.08m
NPV0 = $1,503.70m (for reference)
NPV76.3% = $0 (The pretax IRR based on this method)
]===

New:

===[
NPV12 = $463.60m
NPP10 = $557.38m (for reference)
NPV8 = $674.61m
NPV5 = $910.64m
NPV0 = $1,564.70m (for reference)
NPV72.6% = $0 (The pretax IRR based on this method)
]===

So by some measures it's better than what I estimated previously as this was based on a total of $286m of historic debt (13 equal payments of $22m), where this new calculation is based on an estimated total of $225m of historic debt, and by some measures it's very slightly worse. I think front loaded repayments in this new method is more likely than equal payments I used previously.

As usual, all my own work, there could be mistakes. DYOR ;-)

Ob.

I suppose that stated US$222m (R$900m) of historic debt might equal the NPV10 US$106m stated in our RNS as it is repaid in years 5 to 17 of operations from free cash flow. Perhaps I can figure out what the distribution of payments will look like with that information?

Translated by Google:

"Amapá iron mine to resume operations in 2021" (06.09.2019)
https://abifer.org.br/en/mina-de-ferro-no-amapa-deve-voltar-a-operar-em-2021/
===[
Zamin Mineração, which owns the mining right to a mine in Pedra Branca do Amapari, Amapá, in the middle of the Amazon rainforest, is expected to resume operations in the first half of 2021. The company, which has not produced iron ore since 2014 after An accident at its port terminal in Santana, had approved its judicial recovery plan in the last week of August. The approval of the creditors came because the English Cadence Minerals was accredited as an investor of the project, which includes, besides the mine, a railway and the port.

To be eligible for exploitation, Cadence deposited in court, as a down payment, US $ 2.5 million to pay labor debts and creditors with liabilities up to R $ 150,000. Eduardo de Abreu Sodré, partner of Donelli, Abreu Sodré and Martins Advogados, the office that touched on Zamin's recovery plan, explained that the company's original debt, contained in the judicial recovery and out, was R $ 1.5 billion, but the The liability in the recovery plan was set at R $ 900 million. The approved agreement granted a 30% discount on the recognized debt.

“Cadence will enter as an investing partner and there is a schedule for payment of the installments that will be applied to the operation. In all, it will be $ 115 million to reactivate the operation. It is important to emphasize that the debt will be paid with the revenue obtained from the operation, ”said Sodré. The lawyer added that he will have two more installments that Cadence will pay for the project, one of R $ 27.5 million and another of $ 85 million, funds that will be fully reversed to put the operation up.
...
The lawyer said that in addition to the funds already planned to be contributed by Cadence, Zamin will also sell the ore stock that is concentrated in both the mine yard and the port. “Thus, it will be around US $ 60 million that can be raised with the commercialization of this product. Everything will be reversed in the mine, railroad and port recovery works. The biggest investment, I believe will be in the port terminal, ”added Sodré.

In the contract between Zamin and Cadence there is a clause stating that the funds will be applied after the renewal of all operating licenses for the entire complex. “In two to four months these permits must be granted, including the concession of the Amapá Railroad, a 194-kilometer extension from the mine to the port that returned to the state after Zamin stopped operating. This project has already represented 31% of Amapá's GDP. ”
]===

It looks like we've not been told the full story as R$900m = US$222m... Admittedly journalists make mistakes - perhaps it's 30% of R$1.5B = US$110m which is much closer to the NPV10 US$106m we have been told about?

Ob.

And if you don't want to follow Google's blue link, read their cached version.

You don't need to follow my link if you don't want to. Just google the phrase: "is the owner of an integrated mining project" - with quotes.

Homologation (from the verb homologate, meaning "to approve or confirm officially")

I find all of my information on the internet @Degsie ;-) For instance did you know that the GDP of the state of Amapa in 2012 was about $2.5B. 30% of that apparently being contributed by the Amapa iron project:

"Amapá"
https://en.wikipedia.org/wiki/Amapá
===[
GDP
• Year 2012
• Total R$ 10,420,000,000 (25th)
• Per capita R$ 14,915.00 (15th)
]===

"Approval and Homologation of the Judicial Reorganization Plan of Zamin Amapá Mineração S.A. (Dev Mineração S.A. – under Judicial Reorganization)" (5 de September, 2019)
https://dsmlaw.com.br/en/2019/09/05/approval-and-homologation-of-the-judicial-reorganization-plan-of-zamin-amapa-mineracao-s-a-dev-mineracao-s-a-under-judicial-reorganization/
===[
Zamin Amapá Mineração S.A. is the owner of an integrated mining project, which has already been awarded for over 30% of Amapá’s Gross Domestic Product, with integrated rail, port and mine.
]===

Seriously though. I follow leads. And one thing leads to another. LoL. @Frankie - I'm impressed you followed your nose re Homologation. Good luck unpicking the rest of the document! ;-)

Ob.

How about this @Frankie. The central case discussed at the weekend results in an net present value of around £100m (conservative) to £250m (optimistic) to KDNC based on a $6m investment(!). The pessimistic "$49m" case discussed the past few days highlighted by the corporate presentation a few months ago reduces this by about 27% of $49m = 11m - i.e. still approximately £100-250m. The optimistic "$49m" case neither reduces the NPV or increases it, but makes it more likely to happen as the CapEx requirements appear more easily obtainable.

So overall - yes, a very good deal in my eyes no matter how you look at it! Additionally the scale of the project is huge: there will be a lot of people willing this to happen:

"Approval and Homologation of the Judicial Reorganization Plan of Zamin Amapá Mineração S.A. (Dev Mineração S.A. – under Judicial Reorganization)" (5 de September, 2019)
https://dsmlaw.com.br/en/2019/09/05/approval-and-homologation-of-the-judicial-reorganization-plan-of-zamin-amapa-mineracao-s-a-dev-mineracao-s-a-under-judicial-reorganization/
===[
Zamin Amapá Mineração S.A. is the owner of an integrated mining project, which has already been awarded for over 30% of Amapá’s Gross Domestic Product, with integrated rail, port and mine.
]===

and who spends 9 hours in a meeting unless they are deadly serious? LoL. Reaching the agreement is a massive milestone. I'm sure it'll be much more watertight than the previous failed attempts to kick-start Amapa!

===[
After a long meeting, which lasted more than 9 hours, more than 90% of the creditors approved the plan.
]===

All my own speculation. DYOR :-)

Ob.

For clarity, the "central" scenario is the one discussed at the weekend, where the $49m either doesn't exist or is simply part of the $106m NPV10 debt to be paid back in years 5 to 17.

Any clearer @Frankie? LoL!

For balance, an alternative more pessimistic scenario might be that when all prerequisites have been met we will have invested $6m in return for 27% of the JV company (PBA), and Indo Sino will have signed over its pledge over the iron ore stock to the JV in return for 73% of the JV company and its $49m debt being assigned to the books of the JV company for repayment at some point: no additional cash at this stage only the $6m from us.

In addition to this $49m of debt to be repaid at some point there is another NPV10 $106m of debt: "The JRP schedule contemplates the majority of the historic liabilities will be paid from free cash flow in years 5 to year 17 of operations, which represents a discounted NPV10 debt value of approximately US$106 million."

The CapEx is estimated to be $168.3m meaning that unless the JV managed to sell the iron ore stockpiles for more than net profit of $60m the JV will have to raise an additional:

168.3m - 60m = $108.3m

This assumes that KDNC's $6m isn't included as this isn't for project CapEx, it's for payment of historic employees, small trade creditors, recommissioning report & working capital.

The total new funds invested into Amapa would then be estimated to be that $108.3m which will likely be largely debt with some equity in the project (not dilution of KDNC shareholders, dilution of the project) plus the $6m KDNC invested = $114.3m, which is pretty much what was stated in the article I found yesterday "The expected investments represent approximately USD 113,5 million, subject to the implementation of certain precedent conditions, which shall be determined in the judicial reorganization plan, including the negotiation with fiduciary creditors and the restoring of the operating licenses."

These boards are for discussing and speculating about the unknown right? ;-)

Ob.

"The JRP schedule contemplates the majority of the historic liabilities will be paid from free cash flow in years 7 to year 17 of operations which represents a discounted NPV10 debt value of approximately US$106 million."

Perhaps the word "majority" is hiding 49.9999% of other historic liabilities? i.e. 50% is paid off as above, but there is another $106m hiding somewhere to be paid? We know from:

"Approval and Homologation of the Judicial Reorganization Plan of Zamin Amapá Mineração S.A. (Dev Mineração S.A. – under Judicial Reorganization)" (5 de September, 2019)
https://dsmlaw.com.br/en/2019/09/05/approval-and-homologation-of-the-judicial-reorganization-plan-of-zamin-amapa-mineracao-s-a-dev-mineracao-s-a-under-judicial-reorganization/
===[
On August 29th, 2019, the Judicial Reorganization Plan of Zamin Amapá Mineração S.A. was homologated, enabling the indebtedness, which was already representing over 1 billionais, to be restructured. The process had unusual challenges due to a corporate conflict between the indirect shareholders.
]===

that the total indebtedness was around $250m (1:4 USD:Brazilian Real), so unless they've taken a reasonable haircut - which to date I assumed they have, perhaps that "majority" is only just greater than 50%. Me? Cynical? LoL. Sigh. Always be suspicious of qualifying words. Percentages are your friend. Majority=50%-100%. 95%=95%.

Ob.

Indeed @Barksy - if you or anyone else has a hotline to @Kiran it's probably worth asking for clarification on this:

"INVESTOR PRESENTATION" (June 2019)
https://www.cadenceminerals.com/wp-content/uploads/2019/07/Corporate-Presentation-KDNC-June-PPT-PUBLIC.pdf
===[
Cadence invests US$6 million in Pedra Branca Alliance then IndoSino assigns US$49 million debt to NewCo (Pedra Branca Alliance) and (Ownership IndoSino 73% / Cadence 27%).
]===

I believe I understand what it means - a $49m debt facility provided by our JV partner in return for their 73%, but that use of the word "assigns" is a bit odd in this context. I'm pretty sure it threw me when I first read this months ago as I took it to be a transfer of debt without the associated injection of cash to the JV. i.e. part contribution towards the historical creditors "The JRP schedule contemplates the majority of the historic liabilities will be paid from free cash flow in years 7 to year 17 of operations which represents a discounted NPV10 debt value of approximately US$106 million.", but in hindsight I don't think it is that - why mention it in a presentation designed for fund raising, but not the $106m?

It would be useful to have this cleared up!

Ob

@maddog - posts like your's that appear to completely misunderstand the nature of the project give me the confidence to trust my own analysis and continue to Strong Buy! LoL ;-)

The way I am seeing it is that when all prerequisites have been met we will have invested $6m in return for 27% of the JV company (PBA), and Indo Sino will have lent the JV company $49m in return for 73% of the JV company. This arrangement is presumably more mutually beneficial than a possible alternative of us paying $6m for 27% and Indo Sino paying $16.2m for 73%, as for that same $55m in cash available to kick start Amapa we would presumably have been obliged to provide our share of the debt which I make would have been:

(55m - 16.2m - 6m) * 27% = $8.9m

No thanks.

The CapEx is estimated to be $168.3m meaning that unless the JV managed to sell the iron ore stockpiles for more than net profit of $60m the JV will have to raise an additional:

168.3m - 49m - 60m = $59.3m

This assumes that KDNC's $6m isn't included as this isn't for project CapEx, it's for payment of historic employees, small trade creditors, recommissioning report & working capital.

The total new funds invested into Amapa would then be estimated to be that $59.3m which will likely be largely debt with some equity in the project (not dilution of KDNC shareholders, dilution of the project) plus the $49m provided as project debt by Indo Sino plus the $6m KDNC invested = $114.3m, which is pretty much what was stated in the article I found today "The expected investments represent approximately USD 113,5 million, subject to the implementation of certain precedent conditions, which shall be determined in the judicial reorganization plan, including the negotiation with fiduciary creditors and the restoring of the operating licenses."

So @maddog, you go ahead thinking we need to "find 200 million plus", I'll go ahead continuing to buy on yours, and presumably other's misunderstandings - that's how the market works. Of course I could be very wrong! But what's life without a bit of a gamble? LoL :-)

Seriously everyone, do your own research on this. I still find it quite odd that there has been no mention of the $49m of debt provided by our JV partner in interviews or RNS's, only the most recent corporate presentation - makes me wonder if including it in the presentation was an oversight as it might not be in the BoD's interest's to report this if they are planning on joining in on the next equity raise. Sigh. Me? Cynical?

Ob.

A must read.

"Approval and Homologation of the Judicial Reorganization Plan of Zamin Amapá Mineração S.A. (Dev Mineração S.A. – under Judicial Reorganization)" (5 de September, 2019)
https://dsmlaw.com.br/en/2019/09/05/approval-and-homologation-of-the-judicial-reorganization-plan-of-zamin-amapa-mineracao-s-a-dev-mineracao-s-a-under-judicial-reorganization/
===[
Together with Cadence Minerals and Indo Sino Trading, the latter representing one of the main creditors of the company under reorganization, the company under reorganization presented a new judicial reorganization plan, establishing, among other aspects, in accordance with the terms and conditions comprised in such plan: (i) the payment, as soon as the precedent conditions of the labor creditors, duly entitled, are verified, (ii) 30% of negative goodwill on unsecured credits, and (iii) reverse auction, whenever certain financial covenants are reached, as analyzed by an independent auditor. After a long meeting, which lasted more than 9 hours, more than 90% of the creditors approved the plan.

Prior to the occurrence of the meeting, Cadence Minerals fulfilled a deposit of USD 2,500,000.00 to secure the payment of the labor and disadvantaged creditors.

The expected investments represent approximately USD 113,5 million, subject to the implementation of certain precedent conditions, which shall be determined in the judicial reorganization plan, including the negotiation with fiduciary creditors and the restoring of the operating licenses.
]===

Thanks @degsie.

In our partner we've basically got ourselves an off-taker (presumably!) and someone willing to (part) fund the project, in exchange for what appears to be us doing all of the ground work and a small upfront CapEx to demonstrate our commitment (IMHO). It doesn't really get much better than this. Obviously this is all at face value, but I'm keen to see objective reasoning why this deal isn't as good as it appears. You hear that @maddog, objective reasoning. LoL ;-)

@degsie, indeed - it is certainly looking to me that our partners have agreed to provide $49m of debt funding into the project, and if they renege in part or full our holding can increase up to 49.9%.

"Cadence Minerals PLC - Approval of Judicial Restructuring Plan - Amapa" (30th Aug 2019)
https://www.lse.co.uk/rns/KDNC/cadence-minerals-plc-approval-of-judicial-restructuring-plan-amapa-omqcte36gtcervm.html
===[
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%.
]===

What's everyone else's take on this? When do you think we will get to see the agreement, if ever?

Ob.

The latest presentation mentions IndoSino assigning $49m of debt to the project:

"INVESTOR PRESENTATION" (June 2019)
https://www.cadenceminerals.com/wp-content/uploads/2019/07/Corporate-Presentation-KDNC-June-PPT-PUBLIC.pdf
===[
Plan restructures creditors, caps liabilities, has deliverables from state government and conditions precedent to investment (see next page) new money ranks above creditors and has primary charge over asset.
...
Cadence invests US$6 million in Pedra Branca Alliance then IndoSino assigns US$49 million debt to NewCo (Pedra Branca Alliance) and (Ownership IndoSino 73% / Cadence 27%).
]===

A google translated article states this:

"Operation reactivation in Amapá" (08/21/2019)
http://www.brasilmineral.com.br/noticias/reativação-de-operação-no-amapá
===[
In addition to the $ 2.5 million, Cadence will invest another $ 3.5 million in the plant's re-commissioning and working capital. As a result, it is entitled to a 27% stake in Pedra Branca Alliance, which will control Zamin's mining and infrastructure assets. IndoSino is committed to contribute US $ 49 million, with a 73% stake in Pedra Branca.
]===

So is the $49m new money contributed from IndoSino in the form of debt, or is it just debt? More importantly why hasn't it been mentioned in any of the RNS's or interviews? Either the project is slightly worse than I thought, or much, much better! I'm suspecting the latter. LoL.

Ob.

@maddog - @Kiran has already answered the reason why others didn't get involved - the question of how we managed to land a project which seems too good to be true. In summary: too much effort required for the corresponding amount of perceived risk. The way I see it, others have less risky projects to be getting on with. Us on the other hand... were prepared to take the risk, do the leg work, invest the capital. And it appears to be paying off.

Take a listen from 15:30. I might transcribe this part of the interview if this question keeps getting asked! It wasn't key to me, but I'm beginning to think it might be to others - after all, if something appears too good to be true, it usually is! ;-)

"Union Jack Oil, Cadence Minerals, Chris Bailey, Russ Mould and Glen Goodman" (30 Aug)
https://audioboom.com/posts/7355653-union-jack-oil-cadence-minerals-chris-bailey-russ-mould-and-glen-goodman