Time sensitive opportunity: Cradle Resources Ltd (ASX:CXX)
Company: Cradle Resources Limited
Market Cap: 11.2MM AUD
Take part in the new resources based venture of the group behind Boss Energy & Lotus Resources
Friends, one reason to start this blog was to share investment opportunities that hide in plain sight, but are not discovered by the wider market yet. I am confident, that I found such an opportunity and will share the details with you below. Please do your own due diligence in addition to the research I am sharing with you. The opportunity looks promising, but also brings a certain amount of risk with it. I manage risk through position sizing and thus Cradle Resources is just a 1% position of my equity portfolio.
Cradle Resources Limited (ASX:CXX) is a company I came across when researching niobium as an investment opportunity. In the article I recently published about American Manganese Inc, I mentioned why I am bullish on niobium and why niobium is classified as critical raw material. Niobium is defined as "a soft, grey, ductile transition metal with atomic number 41. Annual niobium supply is currently in the region of 64,000T/y. niobium’s main application is as a strengthening agent in high-grade structural steels. It readily forms niobium carbide and niobium nitride precipitates which improve grain refining and slow down recrystallization during heat treatment. The content required is very small (less than 0.1%), but the strength imparted to the steel allows construction components to be built smaller and lighter. Niobium is also a key ingredient in a range of superalloys such as Inconel," 90% of the niobium supply is produced by the Brazilian company CBMM
and 9% by the Niobec mine in Canada, owned by Magris Resources. This extreme monopolization explains the supply risk depicted in the graph below. Niobium has high economic importance and bears high supply risk.
(Source: 2020 Study on the review of the EU’s list of Critical Raw Materials (2020))
Cradle Resources & Matador Capital
Cradle Resources Limited (Cradle) owns 37% of Panda Hill Tanzania Limited (PHT), which owns 100% of the Panda Hill niobium project in Tanzania. It is located in the Mbeya region and has excellent access to infrastructure, including existing roads, rail, airports and power available in close proximity. Moreover, PHT is on track to be the first new niobium producer in 40 years. Find details of the project on Cradle's website.
Looking at the chart of CXX doesn't paint a pretty picture and one wonders what happened during the last years?
Herein lies one part of the opportunity, that has not been discovered by the wider market. Cradle had a dispute with Tremont Investments Limited (joint venture partner in PHT) as to whether Tremont had the unilateral right to declare a decision to mine. Arbitration proceedings have been held between the parties in respect of this dispute. The arbitration was settled as announced in the Half yearly report on March 12th 2021. As a result of this settlement "Cradle will have no further financial exposure to PHT or the Panda Hill Project whilst retaining significant upside upon the project achieving development funding. However, Cradle will continue to be an active participant in the Panda Hill Project and invest significant director and management time to manage this potentially world class asset." The stock still kept on trading on a discounted level, as if this settlement had never happened, because the market didn't take notice.
In addition, the Cradle management team announced that they would look for new opportunities in the resources sector, adding value for shareholders. This peaked my interest in addition to the fact that Cradle is owned by Matador Capital Ltd. which has a proven track record of identifying strategic resource projects and creating shareholder value. An overview of their current projects can be found below. Grant Davey is founder & owner of Matador Capital, as well as Executive Director of Cradle Resources.
(Source: Matador capital presentation 2021)
Among their projects are two publicly traded uranium companies: Lotus Resources (ASX:LOT) and Boss Energy Limited (ASX:BOE). As part of my article about CGN mining, I laid out why uranium is one of the investment themes I am currently most bullish on. Matador's two uranium projects will be relevant later, to lay out my case.
The opportunity Cradle offers, if you act until July 30th 2021
Once reading one of the latest Cradle ASX announcements, I increased my investment in Cradle to a full 1% position (was roughly 0.7% before). I did increase my position because the information in the announcement made the investment case even more compelling. It was announced in the notice for general meeting, that the Cradle board is proposing a demerger of Cradle's interest in PHT to a new company called Panda Hill Mining (PHM). Current Cradle shareholders would receive 100% beneficial interest in the issued capital of PHM (which will own the beneficial interest in PHT). The demerger offers multiple benefits, but also has some downsides to consider.
CXX shareholders will retain current shareholding in CXX and receive proportional beneficial ownership in PHM.
The PHM book value is currently ca. 0.116 AUD per cradle share held, while current CXX price per share is only 0.059 AUD (dated July 2nd 2021). This represents a 50.8% discount on PHM book value.
CXX will be free to pursue other opportunities without diluting shareholders' interest in assets.
Eligible shareholders will receive equity in a world class niobium project. Even though there are no initial plans to list PHM, I assume there is a good chance that PHM could be listed again, once it is closer to production.
Currently CXX has 18 non-Australia based shareholders (I am one of them😀). According to 3.10 of the notice, CXX will get into contact with overseas shareholders directly and clarify the jurisdictional implications individually. Should a distribution of the pro-rata PHM shares not be feasible, a number of solutions is proposed in the document. However, it could be that the PHM shares can not be taken advantage of by overseas shareholders.
PHM will be a private & unlisted company. It will not be possible to easily buy or sell shares. PHM will communicate relevant updates directly to shareholders.
If the demerger is approved and completed, trading of CXX shares could be suspended for an unknown time. This could happen because of listing requirements of the ASX and because CXX starts business activities that were not announced as part of the original CXX listing. Please be aware, that this suspension could last months or even a year. I have another stock in my portfolio that had been halted for a year. Make sure that you understand all implications and that you are built for such an outcome.
The vote for approval of the demerger is planned to take place as part of the general meeting to be held on July 30th. If not approved, CXX will continue as before. If the demerger is approved, CXX will move forward with the demerger in August. Please read the notice for all details on the proposed transaction and the Panda Hill project.
Possible project of Cradle resources going forward
In the notice it is mentioned that Cradle would "seek to acquire new projects which may achieve greater recognition on the ASX". The question is, which resource does the Cradle team have in mind? The following are only my assumptions and opinion. I could be totally wrong. However, there are multiple clues that can help to connect the dots.
The resource that has the highest probability to be the focus of the new project will be uranium. There are multiple reasons that lead me to this assumption.
Uranium is currently the hottest resource a public, resources based company could be involved with. As mentioned above, uranium is a resource which is in the first inning of a bull market of epic proportions.
Located in the southern part of Tanzania, the Mkuju River mine is a large open pit mine representing one of the largest uranium reserves in Tanzania. Estimated reserves are at 182.1 million tonnes of ore grading 0.025% uranium. The mine has been developed by Mantra Tanzania, a subsidiary of Uranium One which is owned by Rosatom. In 2017 Mantra suspended further development of the project because of low uranium prices. The expected rise in the uranium price lead to initial announcements in 2020, to restart the project and applying in-situ recovery (ISR). Cradle could be a joint venture partner for Mantra Tanzania/Uranium One in order to bring the project public.
Uranium One and Matador/Boss Energy successfully closed a similar deal in 2015. The Honeymoon Uranium Mine in Australia, which is also applying in-situ recovery, had been placed in care and maintenance since November 2013 because of the falling uranium price. It was sold by Uranium One to Boss Energy in September 2015. The project currently is advanced through DFS.
Two successful uranium projects are part of the Matador Capital portfolio and the Matador team most likely see uranium as a resource that "achieves great recognition on the ASX". Owner Grant Davey recently (May 4-7th 2021) bought a significant amount of Lotus Resources shares on the open market, with his own money. He seems to be very bullish on uranium.
Even if Cradle will not be involved in the Mkuju River mine, Tanzania is expected to become one of the biggest uranium producers on the global market. There have been huge deposits of uranium found in Namtumbo (Mkuju), Bahi, Galapo, Minjingu, Mbulu, Simanjiro, Lake Natron, Manyoni, Songea, Tunduru, Madaba, and Nachingwea. It is highly likely, that Cradle can find an exciting uranium project.
Other resources Cradle could go after: The whole group of battery metals is receiving a lot of investor attention and are in demand because of the secular trend of electrification. Those resources could be copper, cobalt, graphite, nickel or manganese. Matador Mining is also involved in gold exploration. However, I want to highlight again, that at this point in time, only an educated guess can be made.
In closing, the CXX demerger is the perfect opportunity to take part in the new venture of a team that has a proven track record of identifying strategic resource projects. A proof point of Matador's track record is the Lotus Resources success story, as pictured below. They increased the value of the project from 0.043 AUD to 0.15 AUD in only 12 months.
(Source: Matador Capital presentation 2021)
In my point of view, holding CXX shares is similar to a call option on a resources based project, plus you have the added benefit of (potentially) owning equity in a private niobium project, which might be listed at a later point in time.
Something to keep in mind for those of you wanting to invest in CXX shares. CXX is very thinly traded and sometimes there is only one trade or no trade at all during the trading session. It can take multiple days for your order to be completely filled.
Please make sure to fully read the notice of general meeting before making an investment decision.
Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research, before taking investment decisions. I am long Cradle Resources.