It’s always darkest before the dawn. This is particularly relevant for two AIM-listed investment companies, Tekcapital and Cadence Minerals.
The interest rate tightening cycle has done AIM companies no favours, and some have been hit harder than others. Companies structured as investment companies, including Tekcapital and Cadence Minerals, are among the hardest hit.
Rising risk-free rates have dented the market pricing of investment vehicles holding privately held assets. This includes not only AIM-listed investment companies but also some of London’s largest investment trusts. Even constituents of the FTSE 350.
Many private equity investment trusts with a market capitalisation of over £1bn trade at a discount in excess of 35%.
These discounts are more pronounced in AIM-listed investment companies, and here lies the opportunity.
The disconnect between Tekcapital and Cadence Minerals shares and their respective underlying valuations, combined with the prospect of interest rate cuts in 2024, provide investors with potential multi-bagging returns over the next year.
The opportunity in these two companies sits nearly as much with the external macro environment and cyclicality of early-stage companies as it does with Tekcapital’s and Cadence Minerals’ business models. The macro environment is also a risk consideration for these companies over the next year.
While we have highlighted the disparities in the valuation of privately held assets and current market pricing, Tekcapital and Cadence Minerals hold both private companies and public companies listed to major global exchanges with clear and transparent pricing, this further strengthens the case for a rerate.
Tekcapital
Tekcapital has a portfolio of four technology companies with the market opportunity to improve the lives of millions of people.
Two companies, Innovative Eyewear and Belluscura, are listed on the NASDAQ and AIM, respectively.
MicroSalt is preparing for an AIM listing, and Tekcapital is likely waiting for more favourable market conditions to pull the trigger.
Autonomous vehicle safety company Guident is privately held, and there are no signs from Tekcapital that a listing is planned in the near term.
Tekcapital’s market cap is currently £13m compared to the portfolio’s net asset value of $53.1m as of 30th June. Equity analysts separately valued the portfolio at a similar level shortly after the release of the half-year results.
If the NAV were calculated today, it would almost certainly be lower due to declines in the underlying share prices of portfolio companies. That said, it wouldn’t be dramatically lower.
The case for Tekcapital sits in the rerating of underlying portfolio companies and the listing of MicroSalt, which will crystalise the value created in the low-sodium salt technology business. Tekcapital recently said MicroSalt had secured deals with top-tier customers, including one of the world’s biggest snack food producers.
There will be arguments for and against individual portfolio companies’ future potential.
To demonstrate the Tekcapital team’s ability to identify technologies with substantial commercial opportunity, we would highlight Belluscura’s multimillion-dollar orders and commitments, representing a step change in revenue generation.
This will likely filter through to Belluscura’s share price once their recent funding package is completed.
Indeed, Tekcapital recently said they saw multimillion-dollar revenue for each of their portfolio companies in the next year as they move away from being early-stage intellectual property-heavy technology companies to gaining significant market traction.
Should this be achieved, the $53.1m net asset value as of 30th June would be a distant memory.
Trading at 8p, Tekcapital has the potential to rally to many multiples of the current share price to move back in line with the current NAV, let alone the potential future NAV of their portfolio companies as they factor in further commercial success.
Cadence Minerals
Cadence Minerals is a mining investment company with holdings providing exposure to iron ore, lithium, and rare earths.
Like Tekcapital, it trades at a significant discount to its holdings’ NAV. However, Cadence Mineral’s potential to multibag in the coming year rests with one individual portfolio holding, the flagship Amapa iron ore project.
Equity analysts at Edison Research recently attributed a 23.9p valuation to the Amapa iron ore project by itself. This compares to the 6p share price Cadence Minerals currently changes hands for.
The Amapa iron ore project located in Brazil was once valued at over $600m by Anglo American. Cadence Minerals has a 32% stake in the asset and has an option to increase its holding.
Cadence is currently working towards bringing the mine back into production and pursuing the necessary permits and licenses to do so. The company was given a boost earlier this year after announcing the acceleration of an operational license, which shortened the issuing time from 36 months to around 12 months.
As is typical of mining projects, investors will likely become increasingly interested in Cadence as production at Amapa nears.
The project benefits from an existing railway line and port, meaning the capex required to start producing iron ore is significantly lower than it otherwise would be.
Cadence has recently entered into an MoU with a party to explore the financing of the Definitive Feasibility Study and eventual mine construction.
In addition to Amapa, Cadence has notable investments in lithium companies Evergreen and European Metals Holdings. Cadence also has a stake in ASX-listed Hastings Technology Metals. The sum of these investments totals very roughly £5m.
With a market cap of £11.3m, this would mean the market is attributing a value of circa £6m to Amapa. The Pre-Feasibility Study released by Cadence Minerals in January 2023 gave the Amapa project a $949 million Net Present Value and $2.96 billion profit before tax over the life of the mines.
Sentiment around junior mining assets soured during the interest rate hiking cycle, hence the low valuation of Cadence Minerals. This can turn on a dime.