Tracker - September 9, 2020: FPX Nickel publishes updated PEA for Decar nickel project
FPX Nickel Corp released its updated PEA for the Decar nickel project on September 9, 2020 which indicates an after-tax NPV of USD $1.72 billion (at 8% discount rate) and IRR of 18.3% for a 120,000 tpd open-pit mine with a 35 year life that has a CapEx of USD $1.7 billion and an OpEx of $6.09 per tonne. The OpEx translates into a C1 operating cost of $2.74/lb nickel and all-in-sustaining-cost of $3.12/lb. The payback period is 4 years. These are very good numbers, though some may quibble that the IRR should be at least 20%. The response is that this hurdle is not a deal breaker for a producer seeking a very long-lived, large scale mining operation in a secure jurisdiction. FPX does, however, use a $7.75/lb nickel price compared to the current $6.76/lb spot price which itself is above nickel's price for most of the past 5 years. The junior justified $7.75 as a base case price because it is the average of 6 long term analyst forecast prices which in turn are based on future supply-demand imbalance projections. FPX included a sensitivity table which shows that if we drop the base case nickel price 20% ($6.20/lb) the after tax NPV and IRR drop to $750 million and 12.8%. The updated PEA assumptions are similar to those I used in a Speculative DCF Model published in Tracker August 18, 2020 whose main conclusion was that a project of this scale and nature has tremendous leverage in terms of future share price depending on the discount rate used and the nickel price. The importance of the updated PEA is that it establishes the new cost structure of the changes FPX has made to the mining plan since recovering 100% of Decar from Cliffs in 2015. With this milestone achieved FPX can proceed to the next step which is raising CAD $10 million plus to fund a PFS which CEO Martin Turenne says would take until Q3 of 2022 to complete, as described in my What's Next Tracker August 21, 2020.
The market responded positively to the news, increasing $0.04 to $0.81 in a continuation of an uptrend that began in late August after Cormark's base metals analyst Stefan Ioannou updated his target price from $0.35 to $0.60. Stefan had done his own speculative DCF analysis which used higher CapEx numbers than FPX released today, but he still had very positive after-tax NPV numbers. His low target price resulted from assuming that 40% of CapEx would be funded through an equity financing at $0.275 which blew FPX's current 179 fully diluted capitalization to about 3 billion shares. His upwards revision simply involved making the equity financing price higher, a pointless exercise because nobody would ever fund CapEx with an equity financing in a junior until it has pushed the project through feasibility and permitting, which Turenne has estimated would cost another $40 million and 3-4 years of effort. However, to his credit, he has done the underlying homework, and is now in a strong position to update his model with FPX Nickel's actual results, similar to what I have done with my speculative model. Cormark is a brokerage firm, so it will be thinking about future financing opportunities, whereas I am only interested in what level FPX snags its $10 million PFS financing at, and how high will the stock go before a major makes a buyout offer.
Given that realistically Decar cannot be developed before 2025, which is also the tipping point where the electric vehicle sector is expected to go exponential, the updated PEA by FPX Nickel is very timely, not because the world needs another nickel optionality play to think about, but rather because ESG credibility is gaining importance among two groups. One is the investment community which is starting to judge companies on the basis of their ESG record, which becomes of interest to all companies who do not want a low stock price because they have been branded as ESG scoundrels. Mining companies by nature of their activity are having a hard time escaping the ESG doghouse. The other group is comprised of businesses which provide goods or services to consumers and rely on branding for their success. Elon Musk's Tesla is a grand example of this group, peddling a "feel good" experience through its electric vehicles. Their vulnerability is having their claim to ESG goodness stripped away by investigators who dig into the sordid underbelly of their supply chains and reveal how complicit these companies are in bankrolling ESG ugliness through their procurement strategies. Elon Musk is a brilliant individual, but brilliance alone does not stave off ignorance, and in his recent pontifications about nickel, he demonstrated himself as a total fool. Not only does the mining industry not need offtake deals for its incremental supply of nickel into a deep global market (the Elon Clown Show even offered to buy their nickel at a discount to the LME price!), but Elon prompted the world to ask him, where do you currently get your nickel from? Do you get it from Norilsk, one of the worst mining polluters in the world which recently disgraced itself by allowing 21,000 tonnes of diesel to spill into an Arctic watershed? No? How would you know that since all the refined nickel ends up in the LME warehouses from which procurement officers simply order their needs?
Now that I understand the cost structure of FPX Nickel's new mining plan I am elevating the company to a Good Spec Value rated Favorite. If Decar gets developed it would be the lowest grade nickel mine in the world, but also the cleanest. It hosts a giant resource capable of supporting a 120,000 tpd mine for 35 years. There is evidence that within Decar's boundaries there is at least one additional deposit of similar scale and possibly better grade, the Van target, which FPX Nickel would drill in 2021 if it scores its $10 million PFS financing. The location in central British Columbia close to infrastructure, including carbon neutral hydroelectric power, is about as secure a jurisdiction you can imagine. The absence of sulphides from this natural stainless steel deposit eliminates a major environmental risk impact from sulphide based nickel deposits. There is even the possibility that the magnesium in the finely ground tailings will serve a carbon sequestration role which FPX is studying in conjunction with the University of British Columbia (September 1, 2020). The unusual nature of Decar's 60%-65% nickel concentrate allows it to bypass the smelters through which nickel sulphide mine concentrates must pass, smelters which by their nature are not going to pass ESG muster. There is also a strong possibility that the nickel sulphate required by EV batteries can be made directly from the concentrate. Ultimately Decar will be of great interest to a producer who wants to be in a position to offer nickel supply that is verifiably clean to brand sensitive producers of consumer products like Tesla. FPX Nickel disappearing in a $5-$10 buyout over the next few years is not premised on nickel prices shooting past $10/lb, but rather on the idea that the strategic ESG value of Decar will attract a market premium.
The graphic above reflects my Decar DCF model updated with the new PEA numbers. It does not exactly mirror FPX Nickel's model because I use a simplified tax treatment model which probably hurts the economic outcome. It shows that the market is currently pricing Decar at USD $110 million, effectively saying that Decar has zero chance of becoming a 120,000 tpd mine. The graphic below translates the NPV graphic above into CAD value per share stock prices based on a 0.76 CAD:USD exchange rate and 179 million fully diluted. The purple line shows the NPV at a 5% discount rate, the yellow line at 10%. The updated PEA used 8%, which at the $7.75/lb base case nickel price suggests a future price between $5-$10 per share for FPX Nickel, subject to adjustment for dilution to get the project to a mine permit. If FPX Nickel can raise $10 million plus to fund a PFS, a fair speculative value would be 25%-50% of that range, which is $1.25-$2.50. Because of the homogenous nature and simplicity of the Baptiste deposit, further feasibility demonstration is unlikely to generate unpleasant surprises. If nickel starts trading in the $7.50-$8.00/lb range, the target price range for FPX Nickel during PFS could shift into the $2.50-$5.00 range. The ESG "feel good" that comes with supporting FPX Nickel is a free bonus.
*JK owns shares in FPX Nickel Corp