Canyon Resources (ASX:CAY)

Investment Memo:

Canyon Resources (ASX:CAY)

- LIVE

Opened: 20-Jan-2025

Shares Held at Open: 2,307,692

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?

It takes 4 to 5 tonnes of bauxite to make 1 tonne of aluminum.

Aluminum is lighter than steel - it makes ships, planes and vehicles more efficient and faster.

It is a critical metal in electrification and defense industries.

Demand for aluminium is set to grow over the next decade, which means that the bauxite demand is set to grow too.

However, the bauxite supply market is extremely tight, and the major exporter, Guinea, has flagged the idea of export bans on the bulk material.

Bauxite prices are rising as buyers look to diversify supply sources.

Our Big Bet for CAY

“CAY takes its bauxite project into production is re-rated to a market cap greater than $1BN”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our CAY Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

Why did we invest in CAY?

One of the biggest undeveloped bauxite projects in the world

CAY owns one of the largest undeveloped, high grade bauxite deposits globally.

A “tier 1” asset with a giant resource and premium quality product

When looking for “tier 1” assets there are two key factors: size and quality.

CAY’s project has a JORC resource of 1 billion tonnes at 45.2% Alumina

with a low silica content of 2.7% (less Silica % the better when it comes to bauxite)

It also has a reserve of 108Mt at 51.1% and 2% silica.

Impending structural changes to the bauxite market

The bauxite market is extremely tight, which has pushed up bauxite prices significantly over the last two years. Global bauxite supply is concentrated with ~80% of production coming from Guinea and Australia.

Any disruptions to supply out of either of those countries could impact the market massively.

Guinea is the primary bauxite supplier in West Africa and the 2nd biggest producer globally... but they recently blocked an export out of the country.

Aluminium producers got spooked and are now looking to diversify their bauxite supply.

The blocked export sparked a rally in the bauxite price from ~US$60/tonne to where it trades now at ~US$110 per tonne.

Permitting complete which paves the way to production

Despite its rich natural resources Cameroon has had very few operating mines.

So, for CAY to secure a Mining Convention and 20 year Mining License, which took about 4 years of work, has significantly de-risked the project and provides a pathway to production.

The new major shareholders of CAY have had success in Africa

Eagle Eye Asset Holdings are the now biggest shareholders of CAY (owns 41.27%).

They were the biggest shareholders in Prospect Resources before the ~$530M sale of its lithium project in Zimbabwe back in 2021. We are backing the team to achieve similar success with CAY.

Eagle Eye Asset Holdings has purchased ~$4.1M of CAY shares on market between August and November 2024 (source).

Compelling project economics, improved by a strong bauxite price

CAY published a Bankable Feasibility Study (BFS) in 2022 showing an NPV of US$452M and CAPEX of US$253M over a 20-year mine line.

However, the price of bauxite has more than doubled since this BFS was published so we think these numbers could improve when CAY puts out its updated study.

In addition CAY’s BFS is only from its reserves, which is only about ~10% of the total current bauxite resource.

In the 2024 Annual Report CAY said it is working on a “revised BFS”, with all the extra drilling and rising bauxite price we assume the numbers are only going to get better.

Project close to existing Infrastructure

The key to bauxite mining is always its proximity to rail to get to a port from where it can be shipped to export markets OR its proximity to smelting facilities where it can be refined into aluminium.

CAY’s project is in trucking distance (~50km) to a rail line that goes to a port.

In December 2020, Cameroon received a EUR$120M commitment from the European Investment Bank to upgrade one third of the railway line that CAY plans to use.

We are Invested in CAY for the long term, and we are hoping that a combination of the above reasons help the company achieve our Big Bet which is as follows:

What do we expect CAY to deliver?

Objective #1: Upgrade/Update JORC resource and revised Bankable Feasibility Study

We want to see CAY upgrade/update its existing 1b tonne JORC resource & 109Mt ore reserve and update its BFS to reflect these new results.

Milestones

in-progress Drill results

not done Resource upgrade commenced

not done Resource upgrade completed

not done Update/revise BFS

Objective #2: Progress project financing & offtake

We want to see CAY lock in offtake and subsequently get project financing arranged to fund the CAPEX for developing its project.

Milestones

not done Offtake agreements

not done Debt/equity funding deal #1

not done Debt/equity funding deal #2

Objective #3: Finalise necessary infrastructure upgrades/builds

We want to see CAY finalise rail and port access agreements ahead of any required upgrades to infrastructure.

Milestones

not done Finalise rail access agreements

not done Finalise port access agreements

not done Finalise infrastructure upgrades

What could go wrong?

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 is delayed or does not materialise and the project is deemed stranded.

US$124M in financing now underwritten - CAY can buy trains to get its bauxite to market - 50% of CAPEX [28-Jan-2025]

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.

Geopolitical 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.

US$124M in financing now underwritten - CAY can buy trains to get its bauxite to market - 50% of CAPEX [28-Jan-2025]
CAY: More than meets the eye - look closer [13-Feb-2025]
Bauxite developer CAY to acquire 9.1% of Cameroon rail company, plus board seat [07-Mar-2025]
Port access approved for CAY. Final Investment Decision Next to Build Bauxite Mine. [28-Apr-2025]

Funding risk/dilution risk

CAY’s project is nearing a Final Investment Decision (FID) meaning the company needs to secure project financing to get into production. Project financing can come in many different forms including equity which would dilute existing shareholders ownership of the project. Dilution may cap the upside on the share price depending on the number of shares that are issued as part of the financing round.

Commodity price risk

CAY’s project is at the BFS stage, meaning it is highly sensitive to changes in underlying commodity prices. If the bauxite price were to fall it would hurt overall project economics and make it harder for CAY to lock in project financing for the development of the project.

Market risk

There is always the possibility that broader market sentiment gets worse and shares as a whole trade lower. In this scenario we would expect CAY’s share price to re-rate lower.

Development/delay risk

Should any or all of the above risks materialise, CAY could wind up stuck in “development purgatory” where newsflow dries up and the project remains stagnant for a prolonged period of time, hurting the share price.

What is our investment plan?

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.

Any sell downs will be in accordance with our trading and hold policy disclosure.

Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 2,307,692 CAY shares at the time of publishing this Investment Memo. The Company has been engaged by CAY to share our commentary on the progress of our Investment in CAY over time.

Investment Memo:

Canyon Resources (ASX:CAY)

- LIVE

Opened: 14-Feb-2022

Shares Held at Open: 3,000,000

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.

Our Big Bet for CAY

“CAY takes its bauxite project into production is re-rated to a market cap greater than $1BN”

Why did we invest in CAY?

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.

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.

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.

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 CAY to deliver?

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.

Certificate Of Environmental compliance granted [25-Oct-2022]

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 could go wrong?

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.

Government expresses support of 1BN tonne bauxite project [10-Oct-2022]
Certificate Of Environmental compliance granted [25-Oct-2022]

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

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.

Strategic investor tips in $12.1M - 42% premium to share price [21-Dec-2022]

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.

Disclosure: 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.