Investment Memo: Canyon Resources (ASX:CAY)

Feb 14th 2022

This investment memo is a short, high level summary of why we continue to hold CAY and what we expect the company to deliver in 2022. The purpose is to record our current thinking as a benchmark to assess the company’s performance against our expectations 12 months from now.

What does CAY do?

Canyon Resources (ASX:CAY) is developing one of the largest undeveloped, high grade direct shipping bauxite deposits globally in Cameroon, Africa. 

Bauxite is the primary raw-material used in producing aluminium

What is the macro theme?

Aluminium is considered a “green metal” due to its infinite recycling capacity & long-lifespan. 

It is also considered a critical industrial metal in all manufacturing settings because it is both light-weight and strong. It is also a critical material in the primary technologies that will be the foundation of a low-carbon future including wind power, solar and energy storage (batteries). 

More recently, the EU also recognised aluminium as a strategically important material in supporting the transition towards a modernised greener economy. 

Why did we invest in CAY?

1. Advanced development ready project: CAY’s bauxite project is well advanced with a PFS completed and the BFS currently being delivered. With a JORC resource in place and a maiden ore reserve announced CAY can quickly make a final investment decision after the BFS is completed.  
2. One of the largest high-grade Bauxite projects in the world: CAY is developing one of the largest undeveloped, high grade direct shipping ore (DSO) bauxite deposits globally. The project has a JORC Resource of 1 Billion tonnes at 45.2% Alumina with a low silica content (~2%) which makes it ideal for aluminium production.  
3. Solid project economics: Stage 1 development of CAY’s project based on a 5 mtpa DSO operation was modelled in a PFS in 2020 showing a post-tax NPV of US$291m, IRR of 37% with a 4.2 year payback period and CAPEX of US$120m.  
4. DSO style mining methods meaning a fast mining ramp-up stage: Bauxite is a unique commodity in that it is sold as a raw-material with very little processing work done on it. Mining methods are generally very simple, with the Bauxite being dug up, stock-piled and shipped directly to purchasers without any processing. As a result production rates can be ramped up very quickly.

What do we expect the company to deliver in 2022?

Objective #1: Mining convention converted into a mining permit. 

• CAY is currently in the final stages of signing a formal mining convention agreement with the Cameroon government. The mining convention is a precursor for a mining permit which sets out the financial and legal rights as well as obligations for CAY during the development and ongoing operation of the mine. 
• We want to see the mining convention agreement signed and then converted into a mining permit. This is the most important objective for 2022, once the mining permit is granted CAY will have 20-years tenure and certainty around the ownership of the project. 
• This will also mean CAY can sign binding financing/off-take agreements with interested parties. . 

Objective #2: Bankable Feasibility Study (BFS)

• We want to see the BFS completed and a move into the final investment decision/project financing stage. We are hoping to see this completed in the first half of 2022. 

Objective #3: Final Investment Decision and financing

• In order to get the mine operational, CAY needs to make a final investment decision along with some progress on financing the project. 

Objective #4: Strengthening of the in-country team to aid project into development

• We want to see CAY strengthen its in-country team so that there is project delivery experience from financing all the way down to operations. 

What are the risks?

Permitting risk – There is a risk the mining convention negotiations fall through and CAY are not granted the mining permits. Given there are a lot of specifics related to the permitting process, we believe this is the single biggest risk for CAY at the moment. 

Development risk – The challenge with Bauxite mines that sit in-land like CAY’s is that they need to have well-built out infrastructure for the projects to be considered economically viable. Cameroon has recently made some upgrades to it’s rail infrastructure but to support a project like CAY’s will need to make more investment. There is a risk this never materialises and the project is deemed stranded. 

Commodity pricing – Bauxite prices are historically un-correlated with the price of aluminium, with demand for aluminium increasing there is a risk that bauxite prices lag or fail to respond to increased demand higher up in the supply-chain. 

Technology risk – Aluminium is recyclable and with an increased focus on improving recycling technologies, there is a risk that demand for new aluminium is met by recycling and therefore demand for new bauxite ore is diminished. 

Geographic risk – While we believe Cameroon’s current political climate is stable, there have been four coups in the last 4 years in the West Africa region. CAY’s project is subject to the volatility of doing business in this part of the world. Geopolitical risks form a significant part of CAY’s overall risk profile.

Funding risk – CAY’s project is located in Cameroon which is still a developing mining jurisdiction, there is a risk that the company fails to attract development financing with investors thinking the geopolitical risk is too high. In addition in the short term, CAY is reliant on tapping the market for funds as it moves toward bigger financing rounds. 

What is our investment plan?

At Wise-Owl we invest in later stage companies with a view to hold for 4 to 7 years.

Our plan is to hold a position in CAY to see it into production.

As with all our new investments, we have a 90 day trading blackout. After 90 days we are allowed to sell a maximum of 20% of our total position.

We may look to sell ~20% of our position late in 2022 if the share price re-rates as the objectives we want to see are achieved.

The authors of this article and owners of Wise-Owl, S3 Consortium Pty Ltd, and associated entities, own 3,000,000 CAY shares at the time of writing this memo. S3 Consortium Pty Ltd has been engaged by CAY to share our commentary on the progress of our investment in CAY over time.