Tracker - April 7, 2021: Spec Value Rating for FPX Nickel Corp (FPX-V)
FPX Nickel Corp was made a Bottom-Fish Spec Value rated 2020 Favorite at $0.16 on December 31, 2019, which was upgraded to a Good Spec Value rating on September 9, 2020 at $0.68 after FPX published a positive updated PEA on Sept 9, 2020 for its Decar nickel project in British Columbia, Canada. FPX was continued as a Good Spec Value rated 2021 Favorite at $0.72 on December 31, 2020, and confirmed on April 7, 2021 @ $0.71 following completion of a $16.1 million bought deal at $0.65 which brings working capital to $21 million, more than enough to fund the estimated $15 million cost to deliver a prefeasibility study by the end of 2022. FPX now has 212.3 million issued and 227.6 million fully diluted, with dilution consisting of stock options except for 1,486,188 broker warrants at $0.65. During the past 6 months loans from Peter Bradshaw and Allyn Knoche related to the 2015 purchase of Cliff's stake in Decar were converted into stock.
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 an 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. I have created a DCF model based on the parameters in the PEA technical report which shows how the NPV varies between 5% and 10% at various nickel prices as high as $10/lb. Tracker Nov 23, 2020 shows the result along with a discussion about the potential to make battery market destined nickel sulphate from the ferro-nickel concentrate which is destined for stainless steel mills. Tracker Mar 17, 2021 updates the DCF model with the new fully diluted stock following announcement of the initial $10 million bought deal. It was subsequently upsized to $14 million.
The updated DCF model shows an after tax NPV per share price target of CAD $4.86 at 10% discount rate and $13.72 at 5% discount rate at the $7.75/lb nickel base case price. At the $7.43/lb spot price the price range is $3.91 to $12.04. At $10/lb it jumps to $11.52-$25.50. Under the rational speculation model the fair value range at the PFS stage is 25%-50% of the ultimate outcome value. At the base case price, which was based on an average of analyst projections, the stock should be trading in a range of $1.22 to $2.43 using a 10% discount rate, and $3.43 to $6.86 using a 5% discount rate. At the 8% rate used in the PEA the AT NPV is CAD $7.48 per share, for which a fair value range at PFS stage would be $1.87 to $3.74. If at the end of 2022 a PFS confirms the PEA parameters, the fair value range would be 50%-75% of the NPV, justifying a move into the $3.74-$5.61 range. No further dilution is needed to deliver a PFS and it is very likely that a major mining company will buy out FPX Nickel before the junior needs to fund the feasibility-permitting stage which could cost another $35 million. FPX Nickel has a Good Spec Value rating because at $0.71 it is very under-valued relative to the fair value range of $1.87-$3.74. The stock should be trading in the $2-$3 range.
The Decar project may be globally unique because of the scale and nature of its nickel mineralization. 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. 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 and smelted as a concentrate to yield refined nickel. 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 in March 2013 that vested it for 60%. Even though Cliffs used a $9.39/lb nickel base case price, the AT NPV at 8% was only $579 million compared to $1.4 billion CapEx and the IRR was a dismal 13%. The problem was a 13% nickel concentrate with 75% payability. Decar became a stranded asset when a hostile hedge fund which had made a wrong-way iron ore proxy bet on Cliffs 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 from Allyn Knoche.
FPX recruited Martin Turenne as the new CEO who led the effort to overcome the limitations posed by the 2013 PEA and which culminated in the updated 2020 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 an optimized ore schedule. 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, can be fed directly into stainless steel arc furnaces in the manner of the 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. But, most importantly, the nickel would be payable at 98% of the LME price.
In January 2020 FPX revealed that a bench scale study by Sherritt showed that 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. Larger scale studies are underway to determine if nickel sulphate can be made at a cost that allows profitable sale pricing. Studies during 2020 also confirmed that the magnesium rich tailings can perform a carbon sequestration role, opening the possibility that Decar could achieve carbon neutrality. Success on the nickel sulphate and carbon neutrality front would make Decar of great interest to ESG conscious manufacturers that require nickel for branded products like the Tesla.
The Good Speculative Value exists because the market is skeptical that such a low grade nickel deposit could be brought into profitable production at current nickel prices. Overcoming that skepticism will be what drives FPX Nickel into the $2-$3 fair value range ahead of the PFS. However, there are 3 additional vectors that could translate into a much higher price. The first is that FPX will spend about $1 million starting early June 2021 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 sulphate. 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 sulphate 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 sulphate. The pressure leaching 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 sulphate conversion and it would be as a cobalt sulphate, 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 sulphate 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 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.
*JK owns shares in FPX Nickel Corp