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Cornish Metals
Raising target to C$38c as we increase tin price on
tight supply-demand; promising first assay from UD
We have updated our long-term tin price assumption to US$25,000/t from
US$20,000/t on the back of accelerating demand and tight supply. Our analysis
of potential projects suggests this higher price level will be needed to incentivise
the new output required to fill projected future deficits. As a result of this, and
adjusting for the updated Share Purchase Agreement (SPA) with Galena/Tin
Shield, previous owners of South Crofty, our target price for Cornish Metals Inc
(“Cornish”) is increased to C$38c (GBp22.2). Cornish has had a strong year to
date following an oversubscribed IPO on the UK’s Alternative Investment Market
(AIM). High-grade mineralisation beneath South Crofty’s historical workings, and
the subsequent Mineral Resource Estimate (MRE) update, demonstrate the
ability to add incremental tonnes of tin. The new terms of the SPA are clearer –
and in our view improved – versus the original SPA which included a somewhat
subjective, variable component linked to the NPV of South Crofty. While the
number of shares to be issued to Galena/Tin Shield under the new SPA is still
dependent on the pricing of future capital raises and the prevailing share price
upon pre-agreed, project-related milestones, the remaining consideration is now
fixed in US$-terms at ~US$9.75m, subject to shareholder approval.
MRE update bolsters economics; United Downs results confirm mineralisation
In June 2021, Cornish released an updated MRE for South Crofty, with a
substantial ~10% increase to Lower Mine and Upper Mine Indicated Resources.
In addition, Inferred Resources for the lower mine more than doubled to 32kt
SnEq. At the United Downs copper-tin project, Cornish commenced drilling in
April 2021 as a follow-up to the exceptional 14.7m at 8.5% Cu and 1.2% Sn
‘Lithium Lode’ discovery hole last year. The first hole of the envisaged ~8,000m
programme intersected two zones of high-grade mineralisation and indicates a
vertical extent of at least 180m to the mineralised zone. Intercepts include 2.61m
at 5.2% Cu, 1.3% Sn and 77 g/t Ag. Assays are pending in further holes with visual
signs of mineralisation reported. If successful, the company is targeting a Maiden
MRE and Preliminary Economic Assessment by mid-2022.

Tin price increase reflects long-term supply-demand dynamics
Global demand for tin is soaring with prices hovering near ten-year highs on the
back of accelerating use as solder in electronics and lithium-ion batteries. The
International Tin Association (ITA) forecasts demand to grow from 355kt in 2020
to 430kt in 2025. Supply is also currently tight following production disruption in
Myanmar and other leading producers as well as LME inventories reaching ~30-
year lows. With tin considered a critical metal within the US & EU and artisanal
sources estimated at 40% of primary production, the supply-demand dynamics
could become even more compelling as conscious consumers and companies opt
for traceable, conflict-free sources. Whilst secondary production from recycling
(currently ~18% of supply) is expected to grow with demand, there has been a
lack of investment into the efficient extraction of tin from end-of-life electronics.
As a result, we see deficits increasing and have increased our long-term tin price
to US$25,000/t from US$20,000/t, to reflect our estimate of the level required to
incentivise new projects at a scoping, pre-feasibility or feasibility study stage.
Valuation: heavily risked DCF implies 52% upside from current price
We continue to model a phased approach starting with a smaller plant processing
material from United Downs, followed by an expansion to take ore from South
Crofty. This generates an NPV8 of ~C$284m, vs ~C$134m for SC on its own.
Lower pre-production capex for the combined, phased plan of US$74m on our
estimates (vs US$113m for SC alone in the PEA) also implies a more easily
financeable project whilst delivering a higher IRR of 32% (vs 26%). We then apply
a blended target P/NPV of 0.44x. While we acknowledge our assumptions for
United Downs are subject to a high degree of uncertainty given it is at an early
exploration stage, we have used a slightly higher multiple than the 0.3x we
typically apply to pre-Resource and pre-PEA stage assets, as the studies already
conducted on South Crofty imply a greater degree of confidence in our estimates.
This approach gives a risked valuation of ~C$125m for Cornish’s assets as at
Jan’22E. Adjusting for cash required over the remainder of 2021/22E, and the
dilutive impact of options, warrants, and future shares to be issued under the
revised SPA, we derive a fully-diluted, risked SOTP of CAD 38c or GBp22.2.

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