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Kaiser Watch June 2, 2023: Outokumpu funds FPX Nickel into 2025

Posted: Jun 2, 2023JK: Kaiser Watch June 2, 2023 with Jim Goddard and John Kaiser
Published: Jun 2, 2023KRO: Kaiser Watch June 2, 2023: Outokumpu funds FPX Nickel into 2025
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch June 2, 2023: Outokumpu funds FPX Nickel into 2025
Jim (0:00:00): What was the Metals Investor Forum show like this past weekend?

The attendance and mood at MIF May 26-27, 2023 was subdued in comparison to the MIF January 27-28, 2023 show in Vancouver when the speaker hall was full with some people standing in the back. Turnout was better on Friday than Saturday thanks in part to a gorgeous Vancouver weekend. The shift is not surprising. I used my KRO Search Engine this week to walk through all the TSX resource sector listings and was left with a distinct impression. Producers, whether focused on precious or base metals, were down 20%-40% from their March peaks. For the base metal producers this is understandable because China's weak post zero-covid rebound has sapped demand for metals, with copper in a conspicuous retreat and most metals following. With China not carrying the global economy onward the focus has been on the potential recession impact of rising interest rates, made worse by the prospect of a US default caused by the failure to lift the debt ceiling. The gold producer downtrend is puzzling because gold has spent the past couple months trying to convert $2,000 from a ceiling into a new base from which higher real price gains can be launched. The market clearly lacks confidence this will happen. Fortunately the risk of a debt ceiling related default has been pushed into 2025.

Another example of the subdued mood was the dinner MIF hosts on Friday evening for the speakers and exhibitors who can bring along a high net worth guest. This dinner is usually very popular and is held at an excellent restaurant, in this case Ophelia, a high end Mexican restaurant on the south side of False Creek. It's only a ten minute cab ride from downtown so the location was not an obstacle. Fewer people than expected showed up and those that did generally left early. This gave me an opportunity to get a crash course in mezcal from Ophelia's bar manager, Erik Mendoza, a forty-something who spent 15 years working in the New York bar scene and knows his stuff. Having done enough Mexican site visits I am reasonably familiar with the varieties of tequila, but my knowledge of mezcal was limited to a vague college memory of a type of tequila with a worm in the bottle, and a recent attempt to learn more which left me with the impression that mezcal is a tequila that tastes like burnt rubber tire. Erik introduced me to a range of mezcals that opened my eyes to what I think will be a growing trend. Unlike tequila which is made from blue agave plants grown in Jalisco state in what has become an industrialized process that allows tequila to be branded with celebrity names like George Clooney, mezcal is made from any variety of agave harvested and prepared in an artisanal manner that involves first roasting the agave heart in underground ovens. This gives mezcal the smoky flavor that distinguishes it from tequila. Most mezcal is produced in Oaxaca state though there is no legal restriction such as with tequila and Jalisco state. Not surprisingly, given the high degree of manual labor involved, bottles of mezcal tend to be more expensive than decent quality tequila. Erik has even imported the hand-painted half gourds that are the traditional way to drink mezcal. He admits that the Vancouver audience has been slow to embrace mezcal, but I think it is only a matter of time before people become intrigued by the complexity and variety that mezcal offers.

I have now assembled into a KRO Blog Comment all the YouTube links to my presentation, my companies' presentations and the Backstage Interviews as well as the MIF Panel Discussion that I moderated. I've also made available a link to the pdf for my powerpoint for those who want to see the graphics behind my talk: Two Global Crises: what they mean for resource juniors.

Sparse Speaker Dinner Turnout gives Ophelia's Erik Mendoza a chance to educate JK about Mezcal
Jim (0:05:02): How were the two companies in your session, Beyond Lithium and West Vault Mining, received?

In terms of traffic experienced by the two companies in my session, Beyond Lithium Inc and West Vault Mining Inc, Al Frame and Sandy McVey indicated about 10%-20% of the conference delegates they spoke with were serious and knowledgeable. That wasn't a surprise in the case of West Vault which is a gold proxy buyout story, but Al Frame was surprised by the level of lithium knowledge, a relatively new concept for retail investors. There were no other lithium pegmatite companies presenting at MIF though there was one junior investigating direct lithium extraction of Saskatchewan brines. After my presentation Saturday afternoon and those of the two juniors in my session I moderated the Newsletter Writer Panel Discussion. I asked six questions of which the last two were about the energy transition and lithium. I first introduced the concept of Lithium Mania 2.0 a year ago at the MIF May 2022 conference and I was curious why I am still an outlier, so I asked, "To what extent do you have a lithium story in your portfolio of covered stocks, and, if none, what do you need to see to embrace Lithium Mania 2.0, namely the search for lithium pegmatites in places like Canada?"

The panelists were generally dismissive of lithium and it is worthwhile to listen to the responses just to appreciate how early we still are in the Canadian lithium boom which tried to get going during the 2015-2018 cycle, but unlike their Australian pegmatite counterparts, the Canadian pegmatite hunters were largely still born. In fact, in 2018 I had a predecessor of Patriot Battery Metals in my MIF session because its Corvette project, which it had acquired for the pegmatite lithium story, was next door to Midland's Mythril project which appeared to be a major new copper discovery for the James Bay region. There is currently a major mismatch between the perception of Australian investors with regard to Canada's lithium pegmatite potential and that of North American investors. Some of the panelists were dismissive because they are ideologically wedded to the claim that fossil fuel combustion as a primary driver of climate change is a hoax. Some think that electric vehicles are a passing fad and the world will never need a six-fold expansion of lithium supply by 2030. Some complain that lithium is an industrial mineral like feldspar or kaolin subject to end-user specifications when in fact it is a metal with final product purity requirements like any other "industrial" metal. Some complain that lithium enriched pegmatites are everywhere and that this will lead to massive over-supply, so why go exploring for it? Never mind that we first need an exploration boom that develops the best deposits before over-supply problems arrive five years down the road.

Some, who have seen stocks like Patriot Battery Metals and Sigma Lithium soar during the past couple years, feel they are too late, that they missed the boat. Sigma Lithium was a Brazilian version of the 2015-2018 Australian pegmatite boom, but Patriot is part of the second wave, equivalent to Dia Met in 1992 which boat nearly everybody missed. One geologist (not a panelist) who spun his wheels two decades chasing diamonds without success and recently refocused on gold and base metals declared that he is not an ambulance chaser.

What I think is missing is a proper understanding of the underlying dynamics of the energy transition, in particular the move by carmakers to shift to EV sales whether or not forced to do so by government climate change policies. Yes, most of us, including myself, missed the first lithium wave that began in 2015, stalled in 2018-2020, but came to life again in 2021 when EV sales caught up with the Australian over-supply. I was skeptical EVs would become more than a fad, and assumed the Lithium Triangle brines would provide whatever the world needed. Now I know better. Those first wave success stories will deliver the first half of the required 600% expansion. The second wave is about delivering the second half needed by 2030.

Patriot Battery Metals is the poster child for this second wave. Even if it delivers a 100 million tonne deposit in July grading 1%-2% Li2O, that solves only a fraction of the lithium supply needed. The EV sector needs a couple dozen such deposits. It is entirely plausible that Patriot Battery disappears in H2 of 2023 at $20 plus, a $2 billion plus buyout within three years of starting a drill program. This summer Canada will witness the biggest boots on the ground prospecting boom in its entire exploration history. Pegmatites are indeed everywhere, but they were not created equally. Only some will be 10 million tonnes plus and grade 1% Li2O or better with low iron and uranium impurities. You won't know until you look. Patriot will emerge as the case study of what happens when a junior finds a pegmatite that appears to have scale and grade.

It is interesting to hear from Al Frame that Beyond Lithium is receiving a lot of serious joint venture inquiries for its 60 plus Ontario lithium property portfolio from other juniors who do understand what Lithium Mania 2.0 will be all about. Beyond is in no hurry to do a farmout. During June-July exploration VP Lawrence Tsang will have prospecting teams checking out every property to see which ones have the best potential. During August-September a couple dozen of the most promising properties will receive closer examination with the goal of turning them into targets that can be drilled in the fall or early 2024. I expect Lithium Mania 2.0 begin to simmer during the summer when rumors leak from the field into local communities from where they propagate into social media networks. Now that the threat of a debt ceiling related default has disappeared, speculators will begin to move in from the sidelines. If Patriot turns into a liquidity event, much of the proceeds will be recycled into lithium pegmatite juniors just getting started. Even juniors with a two buck chuck marketing budget will be swept into the stratosphere. September will be the breakout; the MIF panelists have three months to do get their heads around the concept, do their homework, and come up with their own favorite picks. So long as the junior has a competent exploration team and sufficient funding to put boots on the ground this summer, it is unpredictable which one will emerge as the next Patriot.

Beyond Lithium Inc (BY-CSE)

Bottom-Fish Spec Value
Gathering Lake South Canada - Ontario 2-Target Drilling Li
West Vault Mining Inc (WVM-V)

Good Spec Value
Hasbrouck United States - Nevada 7-Permitting & Feasibility Au Ag

JK Moderates MIF Discussion Panel featuring Eric Coffin, Peter Krauth, Greg McCoach & Robert Sinn
Jim (0:15:45): How important is the new strategic investor FPX Nickel announced this week?

FPX Nickel Corp surprised us on May 30 with news that it had closed a $16 million financing at $0.60 with Outokumpu, the Finland based stainless steel producer which specializes in ESG credentialed products. The stock had closed at $0.425 on Monday, so the $0.60 stock price represents a 41% premium above market. Last year the stock was at $0.39 when FPX announced a $12 million financing at $0.50 with a secret strategic investor. That was at a 28% premium to market. No warrants were included in either case. The financing boosts FPX's treasury to over $30 million, enough to carry permitting and feasibility study related work well into 2025.

Unlike last year's strategic investor, Outokumpu secured rights to offtake 60,000 tonnes of nickel over 8 years, or 7,500 tonnes per year which is only 17% of the 44,900 tonnes production projected by the 2020 PEA. But that offtake right does not come with any fixed nickel price or a specified discount like Elon Musk's Tesla has pursued. It will be based on LME market prices. Why has Outokumpu agreed to such an offtake deal? The stainless steel producer recognizes that ferro-nickel concentrate from Decar will have a high ESG rating, and in light of FPX Nickel's recent demonstration that battery grade nickel sulphate can be made from the concentrate, is worried that its own need for ESG credentialed nickel could experience competition from carmakers. Outokumpu once used to be a mining company but it sold off that business some time go. Now it is a global downstream stainless steel producer. This financing is important because it is the first evidence that a stainless steel producer is happy with the ferro-nickel concentrate Decar will produce.

Outokumpu now owns 9.9% of the 270.6 million shares issued (284.4 million fully diluted), while last year's secret investor drops to 8.9%. That investor has a 7 day window to decide if it will get back to 9.9% by also buying additional stock at $0.60. My suspicion is that the secret strategic investor is a downstream customer within the EV supply chain. I don't think it is a chemical company, a battery maker or a carmaker because none of these entities have any special reason to keep their identity secret, and even if the name were revealed, I don't think the market would care. Yet Martin Turenne insists the market would care. My bet is that the secret strategic investor is an entity that cares about ESG credentials, is not yet in the EV manufacturing business, but may one day become a carmaker that needs clean nickel for its battery. The secrecy is necessary because this may never happen. My prime suspects are Apple and Google, both of whom are working on self-driving cars whose future is probably 2030 and beyond. That twins well with the development timeline for Decar. And if Google or Apple were identified as the strategic investor, that would rock the market.

There has been whining from frustrated shareholders about the dilution at a price which seriously undervalues FPX based on the PEA and what metallurgical derisking has been since the PEA. In fact, the secret strategic investor may also be grumbling to itself because since it put up money at $0.50 FPX has validated the ferro-nickel concentrate flowsheet and optimized the nickel sulphate flowsheet. And now a stainless steel producer gets to buy 9.9% at $0.60? Tough luck secret strategic investor, it was your decision not to help reduce market skepticism about FPX Nickel's plan to produce nickel from awaruite, a natural stainless steel never before commercially exploited.

The next big milestone will be the PFS still expected in September. The market wants to see what inflation and revisions to the flow-sheet have done to CapEx and OpEx. I've applied a 20% cost escalation to the PEA assumptions and the project does not clear development hurdles at the $7.75/lb base case price used in 2020. But it does at the current $9.72/lb nickel price. What will be the base case price used for the PFS? There is concern about the nickel price due to recent expansion of Indonesian nickel supply bankrolled by Chinese entities. China's EV fleet is shifting away from nickel cathode batteries to LFP batteries. Its economic rebound after giving up on zero-covid has been weak. Economic studies at the PFS or higher level have a history of shocking shareholders with cost blowout, but the body language from FPX Nickel suggests there is no negative surprise coming. A rule of thumb is that the after-tax NPV should match or exceed CapEx which in my escalated PEA scenario is USD $2 billion or about CAD $2.7 billion. How close the NPV will come depends on the discount rate used. For long lived projects like Decar (35 years) the difference between 5% and 10% is huge. The potential duplication of Baptiste by Van on the other side of the mountain, which could be developed within ten years of bringing Baptiste on stream, may allow any shortfall to be made up as a "strategic premium" in the eye of a mining company like Vale considering a buyout. If the PFS clears this hurdle fair value should be 50%-75% of the NPV which is $4.75 to $7.12. What FPX management is willing to accept could be less after spinning out the Jogmec alliance and CO2 Lock, the carbon capture story. So investors get only 5-10 times the current price.

The key importance of the Outokumpu financing is that FPX Nickel is no longer in danger of being caught by a recession and needing to raise money at predatory prices while a producer like Vale plays a waiting game. Retail investors in advanced juniors have been shafted multiple times in the past year by deeply discounted Bay Street bought deals from whose levels the stock has not recovered. Nobody is going to take over FPX with a bid that doesn't approach fair value; existing shareholders have too large a position to make a hostile bid feasible. The low valuation is an obstacle to a takeover bid because a producer can only pay a modest market premium. FPX Nickel's biggest challenge is to secure a higher valuation so that a potential developer can make an offer FPX management can consider and which will not get the CEO of the bidder fired if accepted. The big uncertainty is the PFS, which will be resolved within another four months.

FPX Nickel Corp (FPX-V)

Good Spec Value
Decar Canada - British Columbia 6-Prefeasibility Ni

NPV Sensitivity for FPX Decar PEA with 20% Cost escalation

NPV per Share Sensitivity for FPX Decar PEA with 20% Cost escalation
Disclosure: JK owns FPX Nickel; FPX Nickel and West Vault are Good Spec Value rated Favorites; Beyond Lithium is Bottom-Fish Spec Value rated; Patriot Battery is unrated

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