SVH Tracker - May 22, 2015: Recommendation Strategy for First Point Minerals Corp
First Point Minerals Corp was recommended 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. A recommendation strategy was published as SVH Tracker: March 9, 2015. Cliffs spent $22 million to earn a 60% interest in Decar as part of its strategy to become a vertically integrated supplier of inputs for the North American steel industry. The Black Thor chromite project in Ontario's Ring of Fire was one prong of this strategy that had run aground in Canada's First Nations swamp, but the prong upon which the iron producer impaled itself was the Bloom Lake iron deposit in Quebec whose cost overruns coincided with a collapse in iron ore prices that led to the bankruptcy of the Canadian subsidiary that held these two assets. In April 2015 when Cliffs sold Black Thor to Noront for US $27.5 million there arose hope that it would sell Decar soon, but because Decar is in a separate subsidiary not impacted by bankruptcy the new Cliffs management appointed by the Casablanca hedge fund that ousted prior management is in no hurry to do a deal that does not involve cash. With nickel below $6/lb and the LME warehouse stocks at record high First Point is in no position to do a cash deal, nor is any third party in a hurry to pay Cliffs' asking price. So First Point remains a waiting game with the interim bet being that Cliffs will eventually abandon its cash obsession and do a deal whereby it monetizes its 60% stake by giving it to First Point for stock and a royalty.
An alternative outcome is that a third party with a long term vision with regard to nickel and the capacity to pay cash arrives on the scene. The obvious danger facing First Point is that it will need to fund its 40% interest if a new operator arrives with an aggressive work program. However, First Point already holds an uncapped 1% NSR in addition to its 40% working interest, which in the worst case gets diluted into a 1% NSR, leaving First Point with a 2% NSR in what would be a long lived nickel mine. That royalty would be worth far more than the current valuation of First Point once it became apparent that nickel prices are emerging from their slump and feasibility demonstration work is once again underway at Decar. What makes Decar interesting is that its grade is 10% of the lowest grade existing laterite and sulphide mines, which would suggest that it is a hopeless project. However, the host rock is a simple, homogenous 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. Cliffs delivered a PEA on Mar 22, 2013 that 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 fell short of the development hurdles of NPV matching or exceeding CAPEX and the IRR being at least 15%, but 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. This vision is not shared by the financial wizards that now run Cliffs, so Decar is stuck in limbo until First Point or a nickel developer gains control of the 60% stake.
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, but management has since 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 where further work is on hold until nickel prices improve. If the junior headed by Jim Gilbert, Peter Bradshaw and Ron Britten got control of Decar the first step would be 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.
For Spec Value Hunters the primary bets are that First Point can regain control of the project at minimal dilution while nickel prices remain weak and go on to demonstrate that Decar is viable at a nickel price below $7/lb. The secondary bet is that weak nickel prices below $7/lb are temporary fallout from the nickel pig iron boom unleashed by nickel's spike to $24/lb in 2007 and a Chinese metallurgical innovation that allows them to produce an acceptable stainless steel by using NPI rather than refined nickel as a feedstock. Nickel prices collapsed when Indonesia and the Philippines lurched into top spots in nickel production as a result of allowing low grade laterite ore to be strip-mined and shipped to China as raw ore to be fed into China's legacy blast furnaces. Indonesia banned the export of raw ore in 2014 and is forcing the development of a domestic smelting industry, which the Philippines are also considering. That will take time to develop during which Chinese NPI stocks will run down and eventually cause a draw down of the LME stocks of refined nickel. The ability of the Philippines to expand output appears to have hit a wall, and it is likely the Indonesian smelters will need a much higher nickel price. Unless you believe energy costs are on a long term downward trajectory, nickel prices will end up higher, and because Decar's nickel has lower energy costs linked to just grinding and gravity-magnetic separation, with the product sold as a nickel-magnetite blend that can be fed directly into the stainless steel mills, Decar will eventually go into production. With $2 million working capital at the start of 2015 First Point has the ability to play the waiting game for the next two years, during which Spec Value Hunters can accumulate First Point cheaply as a bet on higher nickel prices.
*John Kaiser owns shares of First Point Minerals Corp