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 Fri Jun 2, 2023
KW Excerpt: Kaiser Watch June 2, 2023: FPX Nickel Corp (FPX-V)
    Publisher: Kaiser Research Online
    Author: Copyright 2023 John A. Kaiser

FPX Nickel Corp (FPX-V: $0.520)

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

NPV Sensitivity for FPX Decar PEA with 20% Cost escalation

NPV per Share Sensitivity for FPX Decar PEA with 20% Cost escalation

*JK owns shares in FPX Nickel Corp


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