Canyon resources.png

Canyon Resources Limited

ASX:CAY

Last Price:

$0.043

Our Investment Summary

Date of
Initial Coverage

14-Feb-22

Initial
Entry Price

$0.100

Returns from
Initial Entry

-57%



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. 

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 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: 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 #4: 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 #5: 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. 

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.


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.


Investment Milestones for CAY

Initial Investment: @10c
🔲 Top Slice
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
🔲 12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years


Critical minerals quickly becoming a priority in the EU

Sep 20, 2022

Macro: Commodities


Readers who follow our Investment Portfolios will know that we have been making strategic Investments in commodities that have made critical minerals lists for the EU, USA, Japan, India and Australia.

These minerals are considered critical to the digitisation and decarbonisation macro thematic and include lithium, graphite, cobalt, nickel and PGE’s, to name a few.

Over the weekend, the following speech from the president of the European Commission, Ursula von der Leyen, gave a speech announcing that the EU would look to pass a “European Critical Minerals Act”.

The aim is to avoid the position Europe finds itself in with oil and gas, where it relies on a single trading partner like Russia.

The act would see the EU put in place:

  1. Agreements with partners like Chile, New Zealand, Mexico, India and Australia for the supply of critical minerals.
  2. Identification of strategic projects across all along the supply chain from mine sites to processing/refining projects.
  3. The act would also see the setting up of strategic reserves of these critical minerals.

All of this bodes well for our Investments across commodities identified as “critical minerals” giving these projects strategic importance on the world stage.

To see a list of all the critical minerals in the Australian Critical Minerals strategy document, check out the following link.

Here is a snippet from that speech:


Noosa Mining Investor Conference round-up

Jul 22, 2022

Macro: Commodities


Spanning three days on the pristine Sunshine Coast of Queensland, the Noosa Mining Investor Conference kicked off its 12th year on Wednesday. Attracting a diverse and large spread of corporates, brokers, retail and institutional investors, this year’s event featured over 60 companies presenting and over 1,000 people in attendance, all hosted within the coastal town's Peppers Resort.

At the event, we caught up with a number of executives from our Investment companies (including AKN, AOU, BPM and PFE) as well as companies of interest, either as potential additions to one of our Portfolios, or to gain expert insight to macro and regional headwinds impacting the markets.

The conference is held in the ideal location to mix work with pleasure, and meet a host of CEOs of ASX juniors. Each day ends with a short ‘business at the bar’ session that quickly morphs into talking tactics about where to eat and drink. On Thursday and Friday nights, many head to the Noosa Surf Club for its networking sessions, enjoying its glassed indoor area and open deck to the beach.

We look forward to providing updates on companies we met with down the road.


China considering US$1.1 trillion infrastructure stimulus

Jul 15, 2022

Macro: Commodities


China plans to make up to US$1.1 trillion in financing available for infrastructure spending, which we think will increase commodity demand. Read the following Bloomberg article for details.

Read the full article here.

Below are our key takeaways:

  • China is making 7.2 trillion yuan ($1.1 trillion) in funds available for infrastructure spending.
  • According to Citigroup, infrastructure investment in 2022 is likely to rise by 7.7% versus 2021.
  • President Xi Jinping has called for an “all out” effort to increase infrastructure spending this year to fuel economic growth and meet a GDP growth target of around 5.5%.

The Bloomberg article touches on the impacts of China’s COVID induced lockdowns on the domestic economy.

With economic growth tipped to slow, the Chinese government is getting ready to lean on fiscal stimulus through infrastructure investment to spur economic growth.

We think this type of fiscal stimulus is likely to become a common theme in China and the West, with macro themes like decarbonisation requiring massive CAPEX.

This infrastructure spending forms part of our “commodities supercycle” investment thesis, where we see increased fiscal stimulus and CAPEX investment spurring higher demand for commodities already facing supply shortages.


China considering US$220Bn in infrastructure stimulus

Jul 08, 2022

Macro: Commodities


The following Bloomberg article highlights China’s plan to spend up to US$220 billion to spur economic growth through infrastructure spending.

All of this new infrastructure will require more commodities.

Read the full article here.

Below are our key takeaways:

  • China’s Ministry of Finance is considering US$220 billion of infrastructure funding aimed at shoring up the country’s beleaguered economy.

  • The funding is to be brought forward from next year’s quota, marking the first time the issuance has been brought forward due to concerns around the dire state of the world’s second largest economy.

  • The funding would primarily be used on infrastructure spending to boost an economy hit by Covid lockdowns and a housing downturn.

  • Commodities rallied in European trading hours following the news, with copper moving 3.6% higher on the London Metal Exchange.

For over two years, we have been writing about an upcoming commodities supercycle brought about by infrastructure spending, following decades of underinvestment in the “real economy”.

All this investment in the “real economy” requires raw materials, which is why we think the macro backdrop for commodities over the next decade is strong.

The Bloomberg article highlights the readiness of the Chinese government to lean on fiscal stimulus to spur economic growth at a time when the Chinese economy is slowing down.

Generally, governments would try to respond to slowdowns in economic growth by cutting interest rates. With this tool exhausted after the COVID pandemic, we think infrastructure spending will become the new policy of choice for governments worldwide.

Again, this infrastructure spending will increase demand for commodities which we expect will take commodity prices higher.


VW CEO breaks down batteries and supply chain issues

Jul 08, 2022

Macro: Commodities


The following Bloomberg article showcases the moves major carmaker Volkswagen is making in the batteries industry.

Read the full article here.

Below are our key takeaways:

  • VW is pressing forward with investments along its battery supply chain, commencing construction at a new cell factory in Salzgitter, Germany, one of five facilities in Europe under the carmaker’s PowerCo subsidiary.
  • Salzgitter is home to VW’s main motor factory, and it is where the company last year opened an $80 million facility to research, develop and test EV batteries.
  • Roughly $2 billion will be invested in the new cell factory, where production is scheduled to begin in 2025.
  • VW expects its battery business to generate €20 billion in revenue by the end of this decade.
  • VW CEO Herbert Diess said, “We are invested in some startups and we are looking forward to a joint venture together with Bosch for the machine tools and equipment for those plants, so we’re really gearing up to become one of the bigger battery cell producers”.

The news is just another sign that downstream investment in battery supply chains is showing no signs of slowing down.

VW is one of the world's largest carmakers and is heavily investing in downstream production capacity. It expects this part of its business to generate over €20 billion in revenues by the end of the decade.

This is a situation where investment in midstream/downstream (manufacturing/battery industry) is far ahead of upstream investment (mining), this leads to the supply/demand imbalances for the raw materials required to produce batteries only becoming worse.

The imbalance comes from the timing of these mega projects. Building a downstream / midstream facility could take 1-4 years whereas it takes around 7 years on average to bring a new resource discovery into the production stage.

As a result, we think that raw materials prices will remain high for at least the next decade whilst the mining industry catches up to demand.


CAY enters trading halt

ASX:CAY Feb 24, 2022


On Monday, our latest investment CAY went into a trading halt with respect to permitting at its bauxite project.

We read this news piece on Saturday afternoon which showed that the two tenements (sitting outside of the area where CAY’s resource is) were under an MOU with a Chinese state owned entity.

The MOU listed that they would be handed as exploitation permits (earliest stage of permitting in Cameroon). Importantly the MOU was with the national mining company Sonamines and not issued by the Ministry of Mines.

It didn’t look great for CAY holders however 48 hours later, we read this news piece which showed the Ministry of Mines (the main regulatory body in Cameroon) had cancelled this MOU and said that permitting was a ministry duty and not up to the national mining company Sonamines.

This was swift action from the government who look to us like they were not consulted when that MOU was signed.

We will be watching to see updates CAY provides and hope that everything is resolved this week.