Tracker - January 7, 2020: FPX Nickel confirms nickel sulphate can be made from Decar concentrate
FPX Nickel Corp reported on January 7, 2020 that test work by Sherritt Technologies on its 65% nickel concentrate from the Decar project in British Columbia was successful in demonstrating that pressure leaching will deliver a high purity chemical solution with 98.8%-99.5% recovery to which conventional solvent extraction can be applied to yield a nickel sulphate product suitable for the battery market. Although the testing was bench scale and would require larger scale confirmation, its results are an important development for FPX Nickel because it expands the market for its nickel concentrate beyond that as feedstock for stainless steel mills. The company has not yet made a formal decision to proceed with an updated PEA, but CEO Martin Turenne does say that the PEA would be based on selling a stainless steel feedstock. One reason is that the nickel payability of the stainless steel feedstock can be as high as 95% of the LME price while it will only be 85% for a feedstock turned into a chemical solution. Another reason is that while long term demand for stainless steel will track macroeconomic trends over the projected 40 year mine life of Decar at 120,000 tpd, long term demand for nickel sulphate hinges on battery technology which will most definitely change over the long term. On the other hand the electric vehicle market in a decade could be very substantial and still reliant on the lithium ion battery for which nickel is a key component. The option of selling the Decar concentrate to nickel sulphate makers is thus of strategic importance to whomever might consider buying out FPX Nickel and developing Decar with a CapEx approaching $2 billion. A key factor behind the strategic importance is the homogeneity of the Decar ore in terms of grade and mineralogy compared to laterite ore which is susceptible to vertical grade and mineralogy variation.
FPX included flow sheets for nickel sulphate made from awaruite, nickel sulphides and laterites. Nickel sulphate is not relevant to nickel sulphide deposits because their concentrate is smelted to produce LME grade nickel which is then reprocessed by third parties to make nickel sulphate. In contrast laterite ores, which have to be "smelted" by HPAL (high pressure acid leaching) to produce a pregnant solution, can make a nickel sulphate product before it is turned into refined nickel. Clean TeQ's nickel-cobalt Sunrise deposit in New South Wales is an example of a laterite deposit which has to be treated with HPAL to produce solution to which Clean TeQ proposes to apply ion exchange technology to make nickel and cobalt sulphates. FPX does mention that its concentrate contains about 0.9% cobalt which does end up in the chemical solution, but according to my calculations at the proposed Decar mining scale this would yield only about 600 tonnes of cobalt annually worth USD $20 million at $15/lb cobalt. Decar is not going to be a cobalt sulphate solution to the cobalt supply problem facing lithium ion batteries.
Although FPX Nickel has not made a decision to proceed with an updated PEA, Turenne indicates that while it would take 4-5 months to deliver the PEA the junior would aim for early September to unveil the results. There isn't any additional field or lab work needed for the updated PEA, but if a decision were made and a better stock price enabled additional financing, there are four things the junior could work on during 2020. One is infill drilling of the Baptiste deposit to convert the 15% portion that is still classified as inferred into the indicated category required for a PFS, the next stage if the updated PEA delivers a green light to advance feasibility demonstration. That program would cost about $1 million. Turenne estimates a PFS that does not include the permitting work associated with a feasibility study would cost about CAD $12 million. The second thing arises from the infill drilling, which is sample material for larger scale flow-sheet testing of both the magnetic separation and flotation stages. The third thing is converting the concentrate from pilot scale testing into pellets and chemical solution that can be used for marketing. These three things would be advance work for a PFS.
The fourth expenditure is the most interesting because it involves drilling the Van target on the other side of the mountain that hosts the Baptiste deposit. When Peter Bradshaw's team generated the awaruite concept in 2008 it was aware of the Van target which had a 3 sq km outcropping footprint that was bigger than that of Baptiste. But Baptiste was on the southern side of the mountain which had already been logged whereas the Van target was covered by dense forest. So accessibility governed the initial exploration focus and drilling subsequently established that Baptiste extended under the overburden with an ultimate resource of 2 billion tonnes. But by 2014 the northern side of the mountain had been clear-cut logged, so while Cliffs was in a coma after delivering the PEA in 2013 FPX sampled the Van target on 50 m spacing but did not assay the samples until late 2017 well after it had purchased back 100% ownership of Decar from Cliffs.
The Van sampling results reported on January 15, 2018 suggested an average grade 10%-15% higher than Baptiste, which does not sound like much, but makes a huge difference to the bottom-line. Turenne figures a 3,000 m program of 10 holes to a depth of 300 m on 400 m spacing, sufficient for an inferred resource for mineralization similar to Baptiste, would cost about $1.3 million. Such a program would test a tonnage footprint of 500 million to 1 billion tonnes. If assays support observations of a 10%-15% higher nickel grade for Van with mineralogy similar to Baptiste it is conceivable that the Van target would become the focus of a PFS with similar costs but a faster payback.
Nickel prices which peaked above $8/lb in 2019 are currently languishing in the $6.00-$6.50 range after a surge of raw laterite ore exports from Indonesia to China during H2 of 2019 ahead of the January 1, 2020 resumption of the export ban that was initially set to expire in 2022. A complete ban was instituted in 2014 but subsequently waived for parties that had committed to develop domestic laterite ore processing capacity in Indonesia. The slack created by the Indonesian export ban was picked up by the Philippines which has similar low grade nickel laterite deposits. Nickel pig iron is an innovation developed by the Chinese in response to the nickel supply shortages in 2006-2008 that drove nickel prices above $20/lb. Lower grade laterite ore is shipped whole to China where it is fed into blast furnaces to make stainless steel suitable for Chinese needs. Western stainless steel continues to be made from refined LME nickel. But the stocks in LME and SHFE warehouses are no longer a reliable indicator of supply-demand conditions because a good part of the world's nickel production flows directly from mine to stainless steel mill as nickel pig iron. However, the Philippines no longer has the capacity to expand raw nickel laterite ore supply for the Chinese nickel pig iron market and with the renewed Indonesian export ban the surplus stocks piled up in Chinese warehouses will gradually decline in 2020 which should lead to higher nickel prices. The graphic below from the latest FPX presentation shows that refined nickel has been in deficit since 2016 and is expected to remain so through 2023. It does not account for the nickel pig iron supply which is at the expense of refined nickel consumption. But with the nickel pig iron supply becoming static in 2020 the lid on the nickel price will ease. The wild card, of course, is the direction of the global economy which has suffered from trade war uncertainty. It remains to be seen if this uncertainty eases in 2020. When FPX suggests that it needs a nickel price in the $7-$8/lb range to justify pushing ahead with Decar it is assuming a large margin. The current pricing of FPX Nickel suggests that the market does not believe $7-$8/lb is the future long term reality for nickel, or it may be that the market has little appreciation for the unique nature of the awaruite story. FPX Nickel Corp is a Bottom-Fish Spec Value rated 2020 Favorite based on the speculation that we will see $7/lb plus for nickel in 2020 and that the updated PEA will show that Decar deserves to be developed as a long-lived mine in a stable jurisdiction. If that is the case we are looking at a stock price target in the $1-$2 range.
*JK owns shares in FPX Nickel Corp