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 Wed May 2, 2018
Bottom-Fish Comment: What do the rocks in Oman have to do with FPX Nickel?
    Publisher: Kaiser Research Online
    Author: Copyright 2018 John A. Kaiser

FPX Nickel Corp (FPX-V: $0.16)

Bottom-Fish Comment - May 2, 2018: What do the rocks in Oman have to do with FPX Nickel?

The New York Times published a fascinating article on April 26, 2018 entitled How Oman's Rocks Could Help Save the Planet which is very relevant to the Decar project of FPX Nickel Corp. Whether you care about FPX or not, it is worth reading just from a science point of view. Oman, which sits in the northeastern corner of the Arabian Peninsula, hosts the world's largest exposed body of ophiolite, a chunk of oceanic crust shoved onto continental crust instead of subducted back into the mantle. Ophiolite is a technical term for an assemblage of rocks comprising oceanic crust whose most interesting constituent is peridotite. Peridotite is an igneous ultramafic rock that is the primary component of the earth's mantle. Its most common variation is dunite; less common are harzburgite, lherzolite and wehrlite, the potentially diamond bearing rocks that show up as xenoliths in kimberlites. Peridotites are dominated by the mineral olivine which has a high magnesium to iron ratio. Olivine is not a happy camper at the earth's surface and weathers rapidly, releasing the magnesium element to bond with carbon dioxide to form magnesium carbonate (MgCO3), a solid white mineral. The NYT article is all about how cracks in the ophiolite in Oman are filling with magnesium carbonate in real time, and how this could be a large scale natural method for fixing atmospheric carbon dioxide back into a harmless solid form.

Climate change in the form of global warming is caused by a buildup of greenhouse gases, of which the most notorious is methane. Heaven forbid if something should ever allow frozen methane deposits to thaw. The rise in the earth's temperature during the past century is linked to the significant increase in atmospheric carbon dioxide. Some people think that these measurements are a hoax perpetrated by intelligent educated people who for some reason hate the fossil fuel industry. They are probably the same people who agree with Trump that he is a "very stable genius" and not a big "covfefe". Another group which acknowledges the data but resents the suggestion that we need to incur a sacrifice by reducing our reliance on the "easy" energy provided by fossil fuels argues that the human contribution to the rise in atmospheric carbon dioxide is inconsequential and that switching to alternative sources of energy amounts to inflicting pointless suffering on society. This group, however, understands that a long term unchecked rise in atmospheric carbon dioxide, regardless of the source, is not a good thing and is very much interested in the concept of carbon sequestration, the capture and storage of atmospheric carbon dioxide. One approach is to capture carbon dioxide at its source such as a power plant and inject it back into the earth as a gas. This approach carries the risk of future accidental release possibly caused by an earthquake. It also does not address the problem of millions of cars puffing carbon dioxide out of their tailpipes. Other methods of carbon sequestration consume just as much energy as was burned to create the captured carbon dioxide, or they involve large scale geo-engineering processes that raise fears about unintended consequences. The NYT article about Oman focuses on fixing the carbon back into a solid form using natural processes.

A number of years ago Peter Bradshaw of FPX Nickel, then called First Point, told me that the ultramafic host rock for the awaruite nickel-iron alloy (natural stainless steel) mineralization at Decar could have positive implications for climate change mitigation. So I contacted Peter and was surprised to hear that FPX has now for several years been working with Greg Dipple and his students at UBC's Department of Earth, Ocean and Atmospheric Sciences on carbon sequestration strategies involving mine tailings. The NYT article, in fact, quotes Dipple and mentions that De Beers started a program in 2017 led by Evelyn Mervine which seeks to make its diamond mines "carbon neutral".

Making a mine "carbon neutral" does not sound like an ambitious goal, but in fact even when a mine derives its electricity from a non-carbon source such as hydro-electric or nuclear power, its earth moving equipment, especially for open-pit mines, such as what most diamond mines are, and FPX's Decar will most certainly be, burns diesel or gasoline and thus generates a big carbon dioxide footprint. Now it may be questioned that the world needs any more diamonds or gold, so figuring out how to make a mine carbon neutral is important for obtaining a social license. In the case of Decar the mine plan involves processing a billion tonnes of rock from which less than 1% will be recovered in the form of nickel-iron concentrate. The rest will end up as an enormous pile of tailings. Maintaining the tailings facility during and beyond the mine life is a significant expense, one that can be lessened if the tailings can be stabilized.

Stabilizing Decar's future tailings is where Dipple's UBC team comes into play. Dipple's team is exploring the rates at which the magnesium in the Decar tailings will react with atmospheric carbon dioxide to turn the tailings pile into a semi-solid with a considerably lower risk of future problems. They are also looking at ways to force greater concentrations of carbon dioxide through the tailings pile in order to increase the absorption. When I asked Peter Bradshaw from where FPX would get extra carbon dioxide without the cost of sucking it out of the air, he pointed out that the path of the pipeline associated with the $36 billion Pacific Northwest LNG facility in Prince Rupert proposed by Malaysia's Petronas runs close to the Decar project. LNG pipelines involve many pumping stations which because of remote locations will run on diesel. If any such pipeline were to be approved in British Columbia it would probably come with carbon sequestration conditions. Decar could thus have a local source of compressed carbon dioxide that is effectively a waste product. Petronas pulled the plug on the LNG project in July 2017 after the NDP came to power, though it has argued that this was only because of market conditions, not pessimism about getting approval from champions of the "not-in-my-backyard" philosophy. In January 2018 Petronas indicated it was still thinking about the Pacific Northwest LNG project.

FPX Nickel published an updated resource estimate on February 26, 2018 which incorporated the results from drillling last year at the open southeastern end of the Baptiste Zone where nickel grade and grain coarseness were improving. The drilling has closed off the zone and given the project 5-6 years of upfront better grade ore. This is important because the Cliffs PEA was based on an average life of mine grade with no optimized ore scheduling. In any big CapEx project one tries to schedule mining of higher grade ore in the early years to achieve faster payback and boost the IRR. FPX has also completed an internal marketing study to address the 75% nickel payability assumption in the Cliffs PEA. Cliffs apparently chose 75% as the mid point between the low end of 65% which a sulphide smelter such as Sudbury would pay and 85% which a ferro-nickel producer which normally handles laterite ore would pay. An alternative market not investigated by Cliffs was selling concentrate directly to stainless steel makers. Discussions with these parties lead FPX to believe a payability in the 85%-95% range is conceivable. FPX is now in a position to redo the PEA with better payability assumptions and an optimized ore schedule. Management also believes that the economics would benefit from today's considerably lower exchange rate than the near parity rate Cliffs used in 2013.

CEO Martin Turenne indicates it would take 3-4 months to update the PEA, though a decision has not yet been made to proceed. On March 27, 2018 FPX closed a private placement of 12,250,000 shares at $0.12 to raise $1,470,000, more than double the amount committed when first announced at the end of February. This financing allows FPX to complete a PEA and tread water until the end of 2019. It is unusual in that no warrant was included and had meaningful participation by several brokers whose identities the TSXV for some odd reason chose to disclose in its approval notice, perhaps thinking that brokers not in a position to clip the warrant and flip the stock as soon as it is free trading have nothing to be ashamed about for which a privacy shield is needed. Since updating the PEA is largely office work it can be done any time of the year. There was some talk earlier in the year about visiting the Van target to the north with a small drill program. Clearcut logging had exposed outcrop which sampling revealed to be 0.16% nickel (DTR) rather than the 0.12% of the Baptiste zone, and a coarser grain size. However, FPX in the current miserable market environment has no plans for a program in late summer or early fall.

Although nickel prices are now above $6/lb, and recently traded to $7/lb, one cannot read anything into these gains because of distortions created by US sanctions against Russian oligarchs which dramatically affected the aluminum and alumina market. The nickel price surge relates to speculation that the oligarch behind Norilsk will be next, which would take a big chunk of nickel off the market. But there are limits as to how many toes Trump can shoot off his foot. There is not much of an American nickel industry to protect. Norilsk made it into a recent Financial Times article on April 30, Polluter Norilsk Nickel forced to clean up act, which describes a plan to spend $1 billion to convert sulphur dioxide emissions into 5 million tonnes of gypsum annually for which it has no market. The town of Norilsk is among the most toxic towns in the world, a fact which the FT quotes a Norilsk executive as actually being ashamed about. Trump has apparently bought Scott Pruitt a first class one way ticket to Russia to knock some sense into these executives. The mountain of nickel in the LME and Shanghai warehouses is still huge, and Indonesia has resumed shipping raw laterite ore to China after watching the Philippines inherit most of the nickel pig iron supply space. The nickel FPX would produce at Decar would be a nickel-magnetite concentrate that would be added directly to furnaces for making stainless steel. It will never serve the lithium ion battery market because that requires high purity nickel sulphate which must either be made from refined LME nickel or through some process such as the ion exchange system proposed by Clean TeQ for its Sunrise project in New South Wales.

FPX Nickel Corp has been a bottom-fish accumulation target below $0.10 since I closed out the SVH buy recommendation on December 30, 2016. The Decar project will likely need a long term price assumption of $6.50 or better, so for now FPX should be treated as a nickel optionality play and a side bet that Scott Pruitt will never be reassigned to be head of whatever counts as the EPA in China, Russia, the Philippines or Indonesia where I suspect the willingness to subsidize cheap nickel by dumping costs onto the downstream base has peaked. FPX now has 147.4 million shares fully diluted and a 100% interest, which at $0.16 stock price implies a value of $24 million for Decar. The CapEx in the Cliffs 2013 PEA was USD $1.4 billion and probably will not be much lower if and when a feasibility study is completed. First will have to come a PFS, which management estimates would only cost $10 million given the simplicity of the Decar deposit. For a decision to proceed with a PFS the project would need to have fundamentals which support an after-tax NPV matching or exceeding the CapEx. The stock is creeping higher because the market understands that no further dilution is necessary before 2020 or a decision to proceed with a PFS is made. The updated PEA will be the basis for proceeding with a PFS. FPX management very likely is already sitting on an informal version of the updated PEA which tells it what nickel price is needed to make this project fly. Peter Bradshaw keeps digging into his own pocket to participate in financings. I suspect the stock will be a lot higher than $0.16 when a PEA is published. Bottom-fishers with long positions should stay long, and those who didn't like the risk below $0.10 should consider that the company now has more upside potential than downside risk, so long as the very stable genius does not engineer a global depression that turns his lie about America no longer being great into a truth.

*JK owns shares in FPX Nickel Corp


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