Tracker - March 17, 2021: Bought deal funds FPX Nickel through delivery of PFS by end of 2022
FPX Nickel Corp announced a $10 million bought deal financing on March 17, 2021 consisting of 15,385,000 shares at $0.65 per share, with a 15% over-allotment option of 2,307,750 shares, which, if exercised, would boost the financing to $11.5 million less commissions. Paradigm Capital and Cormark are the underwriters. Combined with $5.5 million working capital this would boost boost working capital to about $17 million, more than enough to fund delivery of a PFS by the end of 2022. The issue is already over-subscribed and may be upsized, but not by much. Long term debt was eliminated with 7,750,037 shares at $0.55 to Peter Bradshaw in October 2020, and 5,312,386 shares at $0.65 to Allyn Knoche in February 2021. FPX was made a Bottom-Fish Spec Value rated 2020 Favorite at $0.16 on December 31, 2019 and upgraded to Good Spec Value at $0.79 on September 9, 2020 when FPX published a positive updated PEA for the Decar project. On December 31, 2020 I continued FPX Nickel Corp as a Good Spec Value rated 2021 Favorite at $0.72. The stock ran as high as $0.94 on Feb 24, 2021 after LME nickel peaked at $8.93/lb on February 22, well above the $7.75/lb base case price in the PEA, before pulling back as part of a general resource sector retreat and more particularly when nickel dropped sharply to $7.32/lb on March 4 after the Chinese stainless steel producer Tsingshang announced it was ramping up nickel supply from its Indonesian operations, including 100,000 tonnes of nickel matte as feedstock to make nickel sulfate for the Chinese EV sector (nickel pig iron is the form destined for stainless steel). That took the steam out of the battery hype related to the post-Trump shift to a Biden supported clean energy future. The bought deal is thus an important milestone because it assures that FPX Nickel Corp is funded to deliver a PFS for Decar by the end of 2022. It also strengthens my recommendation of FPX as a Good Spec Value 2021 Favorite at $0.75 which should be trading in the $2-$3 range based on the updated September 2020 PEA assumptions.
Tracker November 23, 2020 provided a good overview of the FPX story which included my sensitivity analysis of the PEA assumptions are different price scenarios using the discounted cash flow model. The PEA's outcome at the base case price of $7.75/lb nickel was an after-tax NPV at 8% discount rate of USD $1.72 billion with an IRR of 18.3% for a 35 year mine life at 120,000 tpd. The graphic above showing the NPV range at 5%-10% discount rate is basically unchanged, but the graphic below, which converts the NPV into CAD $ NPV per fully diluted FPX terms reflects the new fully diluted figure of 224.1 million shares and the improvement of the CAD:USD exchange rate to 0.803, both of which have lowered the various target prices for FPX under the different nickel price scenarios ranging from spot at $7.26/lb to the fantasy price of $10/lb. Now that FPX has secured the funding needed to deliver a PFS I have advanced the Decar project stage from PEA completion to PFS where the rational speculation model defines as fair value being 25%-50% of the target outcome value. If we accept the $7.75/lb base case price, which implies a future $4.94 price at 10% discount rate and $13.93 at 5%, the fair value range would be $1.24-$3.48 at 10% and $2.47-$6.97 at 5%. Given FPX used 8% as its discount rate, I would suggest that $1.24-$3.48 at 10% is an appropriate fair value range for the stock to trade in between now and the end of 2022 when a PFS is delivered. The bought deal at $0.65 is already over-subscribed because the market knows that the stock can easily trade into the $2.00-$2.50 range. FPX Nickel Corp will represent Good Spec Value until it reaches a $2 price or better, at which point it becomes Fair Spec Value. If the PFS confirms the PEA assumptions, the project will move to the permitting feasibility stage where fair spec value is 50%-75% of the target outcome or $2.47-$3.71 using a 10% discount rate and $6.97-$10.45 at 10%.
Stronger prices can be driven by 3 vectors over the next 12 months. The first is that FPX will spend about $1 million starting early June on a 3,000 m drill program consisting of ten 300 m angled holes to test the Van target. The planned spacing will assess a tonnage footprint of 500-700 million tonnes (the first 21 years of the Baptiste Zone mines 845 million tonnes). Core logging will reveal plenty in the form of visuals before DTR (Davis Tube Recoverable) nickel assays are available in late summer: homogeneity of the host rock and awaruite grain size distribution. Surface sampling at Van has yielded better DTR nickel grades than Baptiste, reaching up to 0.16% nickel DTR. The planned program which should be done by mid August may not have sufficient density to support a 43-101 inferred resource estimate, but management will be in a strong position to expand the drilling program with additional holes so that a maiden resource estimate for Van is possible in Q1 of 2022. However, by October when the last assays have been received the market will already be in a position to make its own back of the napkin calculations. Those who understand that most of the PEA's NPV comes from the first 20 years of operation will wonder, why bother adding another 20 years to the Baptiste deposit's 35 year mine life? The answer is that Baptiste and Van could be developed as independent parallel operations; all it takes is for FPX to sub-divide the Decar property and spin out Van as a new company, effectively doubling the value of Decar.
The second vector is a metallurgical study currently underway which seeks to expand the bench scale outcome of a study done in 2019 by Sherritt on converting the ferro-nickel 65% concentrate into a nickel sulfate. The PEA assumes the nickel concentrate will be sold to stainless steel mills to make stainless steel in a cleaner manner than is being done in China with the nickel pig iron the likes of Tsingshang make from Indonesian and Filipino laterite ore. The cathode in a LMNO lithium ion battery needs 4N or 5N nickel sulphate. Converting the Decar ferro-nickel concentrate requires removing the iron and dropping out the nickel as a high purity sulfate. What is the cost of doing so? Some time during Q2 of 2021 FPX Nickel will report the result of this study which probably will not make any sense to the market because to quantify the nickel sulfate conversion economically will require a larger scale pilot plant study. But the underlying data will be of great interest to end-users like Tesla who are looking for a reliable and clean supply of battery grade nickel sulfate. The process for removing iron puts everything into solution, including the cobalt whose grade FPX has not reported for the Baptiste deposit but for which assay data exists. This cobalt is a non-deleterious impurity in the concentrate destined for stainless steel, but it would be a recoverable by-product from nickel sulfate conversion and it would be as a copper sulfate, the form needed for lithium ion battery cathodes. If FPX includes cobalt with its next Baptiste resource update, it will be a strong clue that the company, at least internally, believes nickel sulfate conversion is feasible.
The third vector is ongoing studies of the ability of the Decar tailings to act as a carbon sink because of the magnesium content that ends up in the tailings. A February 16, 2021 news release revealed that studies being conducted at the University of British Columbia showed that churning was twice as effective as aerating the tailings at carbon sequestration. The ESG (environment, social, governance) trend has powerful momentum and ESG credentials such as the collective carbon footprint of a consumer product may become a powerful deciding factor in consumer decisions. Both sulphide and laterite ore sources for nickel have big carbon footprints; nickel from Decar could end up attracting a meaningful ESG premium, which is why showing that Van is a separate but similar deposit as Baptiste could double the price a major is willing to pay for buying out FPX Nickel Corp.
Most of the $17 million working capital FPX Nickel Corp will end up with will go into tedious PFS work which includes infill drilling, geotechnical drilling for pit walls and the tailings facility, and large scale metallurgical studies. Normally advanced projects at the PFS stage slip into the value trough where the market prices the project below the fair value range because it sees opportunity cost in holding the stock while nothing changes during the PFS work, and maybe even shrinks the outcome value below what the PEA envisioned. FPX Nickel Corp is a very unusual situation because there are three different ways the overall valuation can dramatically improve during the PFS feasibility demonstration stage. The stock's fair value range is $2.00-$2.50 right now based on the ferro-nickel concentrate destined for stainless steel, but success at Van, evidence that 4N-5N nickel sulfate is viable to make from the ferro-nickel concentrate for the EV battery market, and establishing a low carbon footprint per output unit could each make this stock more valuable and trigger a buy out well before a PFS delivery from the likes of Rio Tinto which has no nickel production to speak of and lots of ESG penance to do after the disgrace of Juukan Gorge.
*JK owns shares in FPX Nickel Corp