Tracker - November 23, 2020: FPX Nickel destined to become highly leveraged proxy for nickel price
FPX Nickel Corp has started to attract market attention as multiple vaccine developers report positive trial results and the end of the Trump presidency inches ever closer to reality. Although large scale vaccine deployment will not kick in until the northern hemisphere's October through April flu season has run its dreadful course, it does allow the world to view 2021 as a year when economic life can start returning to normal. This is already happening in China where a harsh lockdown response in Q1 of 2020 has enabled China to get economic growth back on track, pushing up base metal prices. There is fear that an economic recovery will be slow and tortuous in the western democracies as it was after the 2008 financial crisis which sent US unemployment to a peak of 10.1% in October 2009, compared to 14.7% in April 2020 from a low of 3.5% in February. But the situation is very different from 2008 where almost everybody participated in the real estate bubble and where many were left in poor financial condition. In contrast, the covid-19 pandemic and its lockdown response blindsided the economy, suspending consumption by fiat and forcing those who managed to keep their jobs to pile up savings which will be ready to be rapidly unleashed once vaccines establish herd immunity. Most importantly, because the demise of covid-19 will be measurable, consumers will begin to plan well before normalcy is restored. A rebirth of optimism will be accelerated by the end of the Trump presidency as government returns to the task of climate change mitigation, a goal the rest of the world, most businesses, and a majority of American voters never abandoned.
The pandemic response caused nickel warehouse stocks to jump back to half the peak level of early 2016, resulting in a supply surplus for 2020 that is expected to continue in 2021 before deficits reappear. Nickel is overwhelmingly used in stainless steel, and as such demand growth is mainly a function of global economic growth. In 2016 the International Nickel Study Group estimated that only 3% of annual nickel demand came from the battery sector, a mere 81,000 tonnes of the 2.7 million tonnes produced in 2019 worth USD $37.6 billion at the average $6.31/lb nickel price in 2019. The growth of electric vehicle technology has led to a quest for better lithium ion batteries with a declining cobalt content to reduce the cobalt supply risk presented by Congo's role as the dominant supplier (71% in 2019).
Nickel has become a major part of the cathode in nickel-manganese-cobalt (NMC) and nickel-cobalt-aluminum (NCA) lithium ion batteries used by the EV sector. Lithium ion battery related nickel demand is forecast to grow to 400,000 tonnes by 2025. That would represent new technology related demand growth beyond regular economic growth. The battery market requires nickel in the form of a chemical feed called nickel sulphate which is higher purity than the 99.8% minimum of refined LME nickel. Nickel sulphate either comes from reprocessed LME nickel or directly from the HPAL processing of laterite ore. Early metallurgical work indicates that FPX Nickel can make nickel sulphate directly from the 63.4% nickel concentrate Decar would produce. If further work demonstrates this is commercially viable, end users will be very interested in a nickel sulphate supply from a single source with ESG credentials.
The Decar project of FPX Nickel stands to benefit from higher nickel prices arising from a return of global economic growth, and the unique way that Decar's potential nickel output can serve the lithium ion battery market and growing demand for qualifying ESG investment opportunities. The PEA delivered on Sept 9, 2020 alone justifies a Good Spec Value Favorite rating, but the ability of FPX Nickel Corp to serve as a proxy for a return to economic growth and leadership with a science based long term outlook makes it a particularly attractive junior with 5-10 times upside potential during the Biden presidency.
The September 2020 PEA is based on a 120,000 tpd open pit mine that will operate for 35 years. At a base case nickel price of $7.75/lb the PEA generated an after-tax NPV of USD $1,721,000,000 at 8% discount rate with an internal rate of return of 18.3%. CapEx was estimated at $1,674,800,000 with sustaining capital at $1,114,500,000. The market was pleased to see the after-tax NPV slightly better than CapEx. It might have liked to see IRR at 20%, but when you consider the 35 year mine life, the second half of which contributes little to the NPV and IRR economic numbers, 18.3% is pretty good. I have updated my cash flow model for Decar with the ore schedule presented in the technical report filed on September 29, 2020. This allows my model to capture the benefit of lower waste stripping in the early production years and the higher grade of the Southeast Baptiste Zone. The technical report does not break out the use of depletion and depreciation so my model depreciates CapEx evenly over the first ten years and expenses the sustaining cost in the year incurred. The result at 8% discount rate is an after-tax NPV of USD $1,367,000,000 or nearly 21% lower which is likely due to the tax treatment. The IRR is slightly lower at 17.2%. The discount rate makes a large difference in the NPV: at the $7.75/lb base case price the NPV is $888,300,000 at 10% and $2,507,700,000 at 5%. The sensitivity graphic above converts the NPV numbers into per share values using 196 million fully diluted which results in a future stock price range of $5.93 at 10% and $16.74 at 5%. When you wander out to the fantasy price of $10/lb nickel, which is what Nickel Creek Platinum Corp says it needs to make redoing a PEA for its Nickel Shaw (formerly Wellgreen) deposit in the Yukon worthwhile, the price implications for Decar at $14.05 to $31.11 are jaw dropping.
CEO Martin Turenne has estimated it will cost $15 million to deliver a PFS by mid 2022, of which $5 million has already been raised. He estimates a further $25 million will be needed to take Decar to a feasibility study supported and permitted construction decision. The earliest one could expect that milestone is 2025. The challenge for FPX Nickel in 2021 is to persuade the market that a major mining company will eventually want to develop this long-lived project located in a secure jurisdiction, and facilitate raising the other $10 million at a much better price than the $0.55 at which the first $5 million was raised in October. The shift to a Biden presidency and vaccine deployment in 2021 will be the general drivers of a price above $1 per share in H1 of 2021.
In terms of specific milestones, in Q1 of 2021 FPX hopes to have news on the carbon capture studies being done with Decar "tailings" by Dr. Greg Whipple and his associates at the University of British Columbia and Geoscience BC announced on Nov 9, 2020. This group has studied which of the ultramafic rock types common in British Columbia are potentially suitable for carbon sequestration. They released their conclusion on November 3, 2020 that the ophiolites are much better than igneous intrusions because of the serpentinization they have undergone. The ultramafic bodies at Decar are ophiolites which are peridotites formed at seafloor spreading centers which have been rafted onto continental crusts rather than subducted beneath them. The rocks at Decar are special because the low temperature metamorphic forces that caused the serpentinization of the magnesium minerals into a magnesium hydroxide called brucite were just right to force the nickel trapped in the olivine lattice out of their prisons to alloy with iron to create a natural stainless steel mineral called awaruite whose grade is measured through a magnetic recovery based method called a Davis Tube assay. The brucite ends up as part of the tailings which naturally absorb carbon dioxide to form a magnesium carbonate mineral that captures the carbon forever. The UBC research group is investigating how feasible it might be to turn BC's ophiolites into giant carbon sinks, but in the case of Decar the main goal is to establish what it will take for the tailings to absorb enough carbon dioxide to offset all the emissions generated by the mining operation. It is a holy grail of the mining industry to boast that a mine is carbon neutral. The results of Dipple's study of ground up Baptiste ore provided in 2020 should be available in Q1 of 2021. This won't change the economics of the PEA, but for parties like Tesla eager for a "clean" source of nickel for their lithium ion batteries, this could be what prompts a "feasibility demonstration" investment by Tesla or ESG funds at a stock price the Bay Street grinders would cringe at. When Tesla decided to invest in ASX-listed Piedmont Lithium Ltd to help it develop its lithium rich pegmatite dykes in North Carolina, the market value soared from $100 million to $700 million and is now trading at $400 million.
The second milestone, possible in Q2 of 2021, is further news on producing nickel sulphate from the Decar concentrate. On Jan 7, 2020 FPX announced that Sherritt Technologies had successfully used pressure leaching of the concentrate to put 98% plus of the nickel and cobalt into solution (the concentrate has 1% cobalt which is just an impurity if the concentrate is fed into a stainless steel mill), with most of the iron precipitating out. The latter is important because if present in the pregnant liquor solution it adds to the cost of using solvent extraction to recover the nickel and cobalt as separate high purity sulphates of the sort needed by the battery makers. Larger scale tests than the initial batch samples are needed to establish the economics of making nickel sulphate from the concentrate as a specialized secondary product serving an emerging market. Production of nickel sulphate was not part of the PEA.
The third milestone will begin to unfold in H2 of 2021 as FPX Nickel embarks on a maiden drill program at the Van target 6 km to the north of Baptiste where surface sampling has yielded higher nickel grades than at Baptiste. Given the homogeneity of these serpentinized ophiolites FPX could rapidly delineate a clone of Baptiste with a 43-101 resource estimate in Q1 of 2022. However, the market will have done its own back of the napkin tonnage estimates well before that, and, if FPX has published assay data in spreadsheet form on its web site every Leapfrog enabled angry geologist will have a pretty good estimate to pump or bash the market with. Van has a similar apparent footprint as Baptiste, but do we really need another 1.5 billion tonne blob of similar grade? Turenne's response was, "why not two similar scale operations side by side that share the upfront CapEx of a power line, road upgrading, and a dedicated rail loading terminal?" And I realized that I am letting the low nickel grade bog down my imagination. Big mining companies think in terms of long strategic timelines. So those crazy price target numbers in my Decar sensitivity graphic above? Well, if Van delivers similar or better grades than Baptiste, you can double those numbers. If you want to get the market's attention, don't give it crazy numbers. Give it super crazy numbers! Keep in mind that FPX is not yet being treated as a leveraged proxy for the price of nickel because there is tremendous skepticism that such a low grade nickel deposit could be viable. That is a matter if education by FPX Nickel Corp; once the market begins to understand how the underlying fundamentals make Decar so different from deposits like Giga's Turnagain and Nickel Creek's Nickel Shaw, the stock will become a proxy for nickel price trends, except at a much higher elevated price than the current $0.07 level.
*JK owns shares in FPX Nickel Corp