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 Mon Mar 9, 2015
SVH Tracker: Recommendation Strategy for First Point Minerals Corp
    Publisher: Kaiser Research Online
    Author: Copyright 2015 John A. Kaiser

First Point Minerals Corp (FPX-T: $0.05)

SVH Tracker - March 9, 2015: Recommendation Strategy for First Point Minerals Corp

First Point Minerals Corp was continued on January 2, 2015 as a Good Relative Spec Value Buy at $0.045 based on the speculation that the impasse with the new management of Cliffs Natural Resources Inc over the future of the Decar nickel project will have a favorable resolution that enables First Point to resume feasibility demonstration during 2015. First Point is an option on higher nickel prices, though until Decar's destiny is back in the control of a party determined to turn Decar into a mine, Spec Value Hunters should treat First Point as a special situation trading at a very low valuation for reasons beyond its control. The worst case scenario is that First Point ends up with a 2% NSR, 1% that it already holds courtesy of the 2009 Cliffs agreement, and the other 1% it would be diluted down to if another party took control of Decar and market conditions prevented First Point from funding its 40% share. I have ranked the speculative value "relative" rather than "absolute" because the timing of work resumption is uncertain, and because at the current $6.50/lb nickel spot price the project is not viable based on the PEA assumptions. The company still has about $2 million working capital and has decided to hunker down so that it can outwait Cliffs' new management. Although First Point could work on its 100% owned Mich nickel project, the market is currently rejecting the innovation that Decar constitutes. Duplicating the work at Mich already done on Decar will not advance the proof of concept; in the absence of a similar project not offering better grade than Decar, it is better to build on what has already been done at Decar. It is not often that I recommend a junior do nothing, but beyond maintaining an open line with Cliffs' headquarters, preserving cash is the best way for First Point to create value for shareholders as long as the destiny of Decar remains in limbo. The chart below shows how although a 40% working interest in not worth much at $6.50 nickel, the 1% NSR is worth about to $0.30 per share if Decar ever goes into production, and double that if First Point retreats to a 2% NSR by not funding its 40% working interest.

Cliffs, which optioned Decar in November 2009, earned a 60% interest by spending $22 million to deliver a PEA on March 22, 2013 and planned to deliver a PFS by the end of 2015 to boost its stake to 65%, which would put it on track to earning 75% by completing a bankable feasibility study. The PEA proposed a 114,000 tpd open-pit mine that would produce 37,000 tonnes of nickel annually over a 24 year mine life with a CAPEX of $1.4 billion and OPEX of $6.91/t (USD figures). At a base case price of $9.39/lb nickel Decar generated an after-tax NPV (at 8%) of $579 million and IRR of 13% from a resource of 925 million tonnes at 0.12% nickel. These numbers fall short of the development hurdles of NPV matching or exceeding CAPEX and the IRR being at least 15%. However, Cliffs was willing to proceed because the PEA had conservative assumptions that could benefit from optimization and because the project's cost structure hinged less on the main cost drivers of nickel output from laterite and sulphide mines. In other words, Decar's profit margin would expand if higher energy input costs for laterite and sulphide mines spurred higher nickel prices.

The mining proposal is radical in that the grade is 10% that of the lowest grade laterite and sulphide mines that churned out 2.4 million tonnes in 2014. But it is plausible because the host rock is a simple ultramafic rock whose metamorphic history created a natural stainless steel alloy that occurs as grains of a mineral called awaruite. The paltry 0.12% grade is not a conventional fire assay that measures all the nickel content, including the nickel hopelessly trapped in the olivine lattice, but rather a Davis Tube assay which only measures the amount of nickel recoverable through magnetic separation down to a minimum grain size. The coarseness and consistency of the awaruite grains are critical to the bulk tonnage economics of this deposit type. The concept developed by First Point management was that these very large deposits could be developed as relatively low cost mines with minimal reagent consumption and energy costs limited to crushing, grinding and gravity-magnetic separation. A key requirement was the absence of sulphides so that the waste rock would be benign as far as environmental consequences are concerned.

The concept caught the attention of Cliffs which had a strategic goal to develop a cost stable, geopolitically safe supply of the main raw materials required by the North American steel-making industry. The Black Thor chromite project in Ontario's Ring of Fire was one pillar, while the Decar nickel project in British Columbia was another pillar. While Cliffs worked on Decar, First Point scoured the globe for similar deposits on the premise of creating a lock on the best deposits with this never before commercially exploited style of nickel mineralization. First Point has determined that deposits like Decar are in fact quite rare, and has ended up with only one other similar candidate called Mich located in northern British Columbia.

What looked like a win-win relationship with Cliffs has soured for First Point because Cliffs has fallen victim to human folly and the collapse of iron ore prices. It is impossible for Cliffs to deliver a PFS by the end of 2015 because no work has been done on Decar since Cliffs' management came under attack in 2013 from a disgruntled New York "event driven and activist" hedge fund called Casablanca Capital LP unhappy with the Bloom Lake cost overruns. Casablanca won a proxy battle in mid 2014, though it was a pyrrhic victory because by then Cliffs' entire business was under siege due to collapsing iron ore prices. Casablanca is now trying to reorganize Cliffs by turning the iron cash flow into a dividend paying master limited partnership and by shedding non-core assets that include the 60% Decar stake. That has left the Decar project as effectively a 60:40 joint venture with Cliffs as the lame-duck operator. Casablanca, which apparently has not noticed that the nickel spot price is well below the $9.39/lb PEA base case price, is trying to sell the 60% stake on unrealistic investment recovery terms. As the after-tax NPV sensitivity chart above demonstrates, Decar is worthless below $8/lb nickel though there is substantial upside leverage above $10/lb.

First Point does not have a right of first refusal, but it does own an uncapped 1% NSR that is substantially more valuable than the current $6-$7 million market cap if a new group takes over operatorship of Decar. An obvious way for Cliffs to monetize its $22 million Decar investment would be to swap the 60% Decar stake to First Point in exchange for the 1% NSR and enough stock to bring its equity stake in First Point to 19.9%. If First Point regained 100% of Decar on non-dilutionary terms, shifting the destiny of Decar out of the hands of financial wizards into resource developers, the market would revalue First Point sharply upwards, and this story would be rolling again. Within a couple years Cliffs would be able to sell its First Point equity stake and 1% Decar NSR for considerably more than the $22 million sunk cost which it cannot recover from First Point directly nor likely from a third party unless nickel soars above $10/lb. The graphic above shows how the 1% NSR value varies with nickel price and with a seven year startup discount. First Point has made its own proposal to Cliffs, but has not had a formal response. For Spec Value Hunters First Point is a bet that Casablanca will succumb to a win-win deal, ideally before August 2015 so that First Point can conduct its SE Extension drilling program this year.

But what if a deal is reached on terms that leave First Point with 100% control of Decar? The junior headed by Jim Gilbert, Peter Bradshaw and Ron Britten would like to delineate the Southeast Extension of the Baptiste deposit where better grades and location would allow optimization of the mining plan. Management estimates it would cost about $3 million for this drilling and additional processing of 10-20 tonnes of material from existing drill holes to create a representative bulk sample. Not only would this "bulk sample" deliver the next metallurgical milestone of what is the optimal concentrate grade, but it would also provide concentrate sample material for steelmakers to evaluate as potential feedstock and set the stage for future off-take agreements. The 2013 PEA was conservative in that its ore schedule consisted of life-of-mine average grade, a hefty 25% payability discount for the nickel content, and a high contingency cost for what is a fairly simple flow-sheet of crushing-grinding and gravity-magnetic separation. Management also thinks that a mapping program aimed at outlining the barren dykes within the Baptiste deposit could allow diversion of this material to the waste dump and thus avoid the dilution assumed by the PEA.

First Point has about $2 million working capital left, so it would need to raise additional funds to complete this program which could result in the delivery of an updated PEA in 2016, which is why management would prefer a non-cash deal with Cliffs. If the updated PEA can end up with a $6.50/lb nickel base case price that allows the after-tax NPV and IRR to match or exceed standard development hurdles, First Point would be in a strong position to raise the $10-$20 million needed to complete a PFS which may require a pilot plant study. The graphic above shows the after-tax NPV per share for a 40% and 100% stake using a 10% discount rate. First Point's immediate goal would be to lift the 100% ownership NPV curve so that Decar is in the money at $6.50 nickel. Any upwards price movement by nickel would translate into a substantially higher NPV per share outcome.

Nickel confounded the market in 2006-2007 with its spectacular price rise to $24/lb after several years of record low nickel warehouse stocks. As the annual supply chart above shows, speculators had the right idea, for nickel output has grown 49% from a 1,763,000 tonne peak in 2007 to a 2,630,000 tonne peak in 2013. What speculators did not understand was that China had figured out a way to make a lower quality stainless steel by feeding their mills with nickel-pig-iron rather than the refined nickel produced by laterite and sulphide derived nickel producers. The Chinese also happened to have spare blast furnace capacity and figured out that if raw laterite ore were imported from Indonesia and the Philippines they could cheaply produce nickel pig iron. The result was a dramatic surge of nickel production that put Indonesia and Philippines into first and second place, displacing Russia, Canada, Australia and New Caledonia. The party ended in 2014 when Indonesia went through with a ban on the export of raw ore that resulted in a 50% decline in Indonesia nickel production during 2014. Nickel prices initially surged in 2014, but settled down as LME warehouse stocks climbed to record levels. One would have expected nickel prices to fall further, but underlying demand growth is strong, and the destocking of raw laterite ore that China had piled up ahead of 2014 is expected to end in 2015. There is also concern that the Philippines may also introduce an export ban, though a more likelier scenario is that the Philippines' supply growth has stalled, in part because of concern that saprolite strip mining is having a negative environmental impact. The consensus among nickel market forecasters is that by 2018 the nickel market will be in deficit again and the world poised for a repeat of the 2006-2007 nickel price spike. Unlike the copper situation where there is an inventory of large copper deposits with a grade that is marginal at today's copper price, there is not a large inventory of big laterite or sulphide nickel deposits that could be quickly pushed into production. The supply growth will have to come from smaller deposits or big low grade deposits such as Decar. Weak nickel prices during the next six months will be good for First Point if that enables getting a win-win deal done with Cliffs. In an ideal scenario First Point gets a deal done by May, smart investors clean up the market into the $0.20-$0.30 range, and First Point raises $5 million from institutional investors that allows it to execute on the goal of drilling the Baptiste Extension during 2015 and delivering an updated PEA in 2016, with much of that work contributing to what is needed for a PFS. Spec Value Hunters should treat First Point Minerals Corp as a near term bet on a deal breakthrough and a long term leveraged option on higher nickel prices.

*JK owns shares in First Point Minerals Corp


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