Tracker - December 13, 2019: Spec Value Rating for FPX Nickel Corp (FPX-V)
FPX Nickel Corp has had a Bottom-Fish Spec Value rating since 2017 while the junior worked on over-coming the limitations embedded in the PEA Cliffs delivered in March 2013 for a 114,000 tpd open-pit nickel mine at Decar which required a $10/lb plus nickel price to be viable. Most of this work has been completed and 2020 promises to be a relaunch of the Decar nickel story with an updated PEA. FPX caught my attention in 2010 when the junior, at the time called First Point Minerals, switched from gold exploration to nickel in the form of a very low grade deposit called Decar. Located in central British Columbia, Decar hosts a 2.2 billion tonne resource averaging 0.122% nickel within an ultramafic complex whose $16 per tonne rock value ($6.14/lb nickel) at first glance seems hopelessly low. But what attracted Cliffs in late 2009 was the unusual style of nickel mineralization, a natural stainless steel alloy (nickel-iron) called awaruite. Normally the nickel in these large low grade deposits is partly tied up in the olivine lattice from which it is not cost effectively recoverable and as a sulphide which must be floated from the milled ore. The 0.122% grade is not based on the usual fire assay, but rather on a Davis Tube assay which uses magnetic and gravity separation to recover grains above a certain size. Cliffs recognized the potential for a long lived nickel resource in a stable jurisdiction close to transportation infrastructure which could be processed with a simple flow sheet of crushing, grinding, and magnetic-gravity separation. Cliffs spent USD $22 million to deliver a PEA that vested it for 60%. The PEA was based on a life of mine average grade ore schedule and a concentrate with only 13% nickel of which only 75% was payable. Although OpEx was only CAD $6.91/t, CapEx was $1.384 billion and at the base case price of USD $9.39/lb nickel the after-tax NPV at 8% was only CAD $579 million while the IRR was 13%. These numbers did not clear minimum development hurdles and by 2015, after a brief spurt above $9/lb nickel when Indonesia imposed a ban on the export of raw nickel laterite ore, nickel was on its way to a level below $5/lb. Decar became a stranded asset when a hostile hedge fund which had made a wrong-way bet on Cliffs as an iron ore proxy ousted management and started liquidating assets. FPX reached a deal to buy back Cliffs' 60% stake in September 2015 for USD $4.75 million which was funded by a $5 million loan due in 2020 from an undisclosed party which apparently has since also become significant shareholder. FPX recruited Martin Turenne as the new CEO who spent the last 4 years overcoming the limitations posed by the PEA. The first of these was the un-optimized ore schedule. Expansion drilling in the area of the Southeast Baptiste zone where grades were better led to an updated resource estimate in early 2018 which allows the development of an optimized ore schedule (mining higher grade ore early in the mine life boosts NPV and IRR and shortens payback time). Metallurgical studies initiated in 2018 led to a new flow-sheet whereby magnetic separation converts 92% of the ore into non-acid generating tailings, with the remainder subjected to a 9,000-10,000 tpd flotation circuit, resulting in a concentrate that is 65% nickel and 30% iron and which, once pelletized, could be fed directly into stainless steel arc furnaces in the manner of ferro-nickel produced by Vale and Anglo American. This substantially reduces transportation costs, increases the payability of the nickel content, and enhances the marketability of the concentrate which, unlike smelted nickel sulphide concentrate, will require an offtake agreement. It is important to note that in a low grade sulphide nickel deposit all the ore would have to be floated. In October 2019 FPX initiated a test by Sherrit to see if pressure leaching can strip the iron out of the concentrate, allowing solvent extraction to produce a high purity nickel sulphate suitable for the battery market. Results are expected in January 2020, and, if positive, would allow FPX to add at modest CapEx a 100-200 tpd autoclave. Although nickel sulphate has been priced at a premium to refined nickel, the expectation is that it will end up at par. The benefit to FPX would come in the form of an expanded offtake market and higher payability than only a stainless steel furnace feedstock would attract. The separated iron could also become payable. It would also allow FPX to brand Decar as being in the service of "clean energy", in addition to the possibility that the high magnesium content of the tailings could play a carbon capture role that might bring the Decar Mine close to carbon neutral. FPX has also received help from the nickel market whose price topped $8/lb in 2019 when Indonesia announced that on January 1, 2020 it would end 2 years early the waiver from the raw ore export ban it granted to those entities which were building domestic processing infrastructure. The price of nickel had declined back to the $6/lb level by the end of 2019 as everybody scrambled to export as much raw ore to China as they could before the ban took effect. That pressure should ease in 2020, and, coupled with projected nickel supply deficits, should lead to a $7-$8/lb long term price range for nickel. The purpose of the updated Decar PEA is to demonstrate that Decar deserves to be developed in that range; a key milestone will be a management decision in 2020 to complete the updated PEA which would only take a few months to do. CapEx is expected to be higher. In 2013 the CAD was near par with USD, though now the exchange rate is about 1.32 CAD for 1 USD, and since the real world cost of CapEx will not have declined, we can assume a starting base of USD $1.4 billion. A big increase will be in the provision for the tailings facility to which Cliffs had allocated $80 million for a 114,000 tpd operation. Third party consultants have indicated that for the 120,000 tpd scale FPX is contemplating the cost will be near $300 million, especially in light of the scrutiny on tailings storage facilities in the wake of the Mt Polley failure. The addition of a flotation circuit will be offset by the elimination of the gravity circuit. Magnetic separation is very efficient in extracting awaruite grains, but it also recovers the magnetite, which has a similar density and thus made gravity separation inefficient, a key reason the concentrate in the Cliffs PEA was only 13%. Although awaruite is not a sulphide, as an alloy it does float, whereas magnetite as an oxide does not, which is why using a flotation circuit yields a 65% nickel concentrate. There will also be an additional cost related to the concentrator due to a plan to reduce the grind size to a third of what Cliffs used in the PEA. Add in contingencies and the CapEx could be as high as USD $2 billion or CAD $2.6 billion. In an earlier version of this Tracker I mentioned that a key development hurdle is that the after-tax NPV should at least match CapEx, which implies that FPX would not bother doing an updated PEA unless the internal numbers clear that hurdle. Thus at 167.4 million fully diluted and a 100% net interest an NPV that matches CapEx would imply a future price of nearly $15 for FPX (without accounting for dilution needed to complete a BFS which management estimates would cost $45 million). Such a PEA outcome would push Decar into the prefeasibility stage where fair speculative value is 25%-50% of the eventual outcome, or a $3.75-$6.50 price range for FPX. However, CEO Martin Turenne has pointed out that a very large mine with a 30 plus year life has a lower NPV threshold so long as IRR exceeds 10%. This would be especially the case with Decar which is a 2 billion tonne homogenous deposit in terms of grade and mineralogy. Assuming the NPV comes in at two-thirds CapEx, or CAD $1.7 billion, the fair value range for Decar at PFS would be $425-$850 million or $2.50-$5.00. This sort of dramatic upside potential helped FPX attract a $4 million loan from chairman Peter Bradshaw which was used to pay down half of the 2015 loan to buy Decar from Cliffs. Bradshaw's loan is due in 2025 while the maturity for the remainder of the other lender's loan has been extended to 2022. Shortly after the loan refinancing and a $1,250,000 financing at $0.15 closed in September 2019 a new insider called Allyn Knoche showed up with 20.08 million shares, joining Bradshaw with 20.9 million shares and Kitson Vincent with 16.5 million shares as the top 3 shareholders controlling 42% of FPX. I suspect that Knoche is also the lender, which would be a good thing for minority shareholders, but because the third party lender still desires anonymity FPX management cannot comment on my speculation. Since 2017 FPX has completed 4 financings at $0.10-$0.15 with no warrant to raise $4.3 million to fund the PEA improvement work, a good part of it coming from insiders. About $1.8 million working capital remains. By the time FPX delivers an updated PEA about USD $25 million will have been invested in the Decar project which is nearly double the market value of FPX. FPX Nickel Corp continues to deserve a bottom-fish spec value rating with an upgrade to a Good Speculative Value rating justified once management signals that the updated PEA is underway.
*JK owns shares in FPX Nickel Corp