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Cardero Resource Corp. (CDY) Tries To Do Something

 December 21, 2012 09:54 AM


Cardero Resource Corp. (CDY / CDU.TO) is part of the Cardero Group.  Don't confuse the names.  I'll be talking about the junior explorer today and not its parent.  This company is out looking for coal, or iron, or something.  The thing with families of prospect generators is that they must move along quickly if they can't find anything worth mining at a given project.

The CEO knows his coal, so at least they put the right person in charge.  Their corporate structure is unique; they have separate wholly-owned coal and iron companies presumably to accommodate the properties they're exploring.  I don't often see that in a company that was itself created from a prospect generator parent.

Now, about those properties.  Carbon Creek is an aptly-named British Columbia coal deposit that is showing some progress.  They released a pre-feasibility report for that property in November 2012 and yet the share price has slightly declined since then (hint:  not a good sign of market confidence).  Read that study yourself.  It estimates the project's cash cost of production at $74/ton.  Their base case assumptions on what this product can earn in the world market might be optimistic.  Look at the EIA's data on sales prices of coal by mine size in the U.S. for 2011.  Cardero's cash cost is barely breaking even with mid-range mine sizes.  The spot coal price for the U.S. is currently under CDY's cash costs.  Maybe that's why the stock market's not impressed.  If they plan to sell the coal to non-U.S. markets where the spot price is higher, they'll have to build out the rail and power infrastructure at the site.

Check out their Sheini Hills iron project in Ghana.  They've got a local JV partner but that doesn't impress me much.  That partner's CEO is also running several other Ghana-connected companies, so perhaps he could explain how he can manage all those different entities.  Ghana currently ranks 64th on Transparency International's corruption index.  The political climate for a project is extremely important if it is to successfully avoid corruption or nationalization.

They've also got a Minnesota project.  They already have two 43-101 reports from January 2012 that conclude the two properties merit more work.  The good news is that their Q3 financial statement for 2012 shows over $10M in cash on hand as of July 31.  The bad news is that they also lost almost $3M that quarter.  They'll still be spending money to prepare the Carbon Creek project for production, so they'll need to raise more capital next year.  Existing shareholders should expect further dilution.

Cardero Resource Corp. is a risky bet on the viability of Canadian coal outside the North American market. It's also a bet on unproven resources in Ghana and Minnesota.

Full disclosure:  No position in Cardero Resource Corp. at this time.

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