FPX Nickel Corp released the results of its Decar prefeasibility study on September 6, 2023 and they were very good for a mining project with a mining rate of 108,000-162,000 tpd. After tax NPV at 8% came in at USD $2.01 billion with an IRR of 18.6% using $8.75/lb as a nickel base case price (LME nickel has been range bound this year at $9-$10/lb). AT NPV at 8% discount rate is slightly below CapEx of $2.182 billion but close enough to clear that hurdle. The IRR at 18.6% is good for such a large project. The resource, now classified as probable which is higher quality than required for a PFS, is roughly the same as the PEA estimate but the LOM grade has improved from 0.121% to 0.13% nickel (DTR as opposed to total nickel grade). The 36 year mine life has been shortened to 29 years by expanding the operating rate from 108,000 tpd to 162,000 tpd in year 11. The PFS assumes selling most nickel concentrate to the stainless steel market with a 95% payability of the LME nickel price for contained nickel, while the mixed hydroxide product (6.5% of recovered nickel) is sold at 87% payability, presumably to the battery market. No revenues were assigned to the magnetite by-product. The cobalt and copper content in the ferro-nickel concentrate is also not included because it is only recoverable by processing the ferro-nickel concentrate with the nickel sulphate refinery.
FPX Nickel has included a refinery option with a scale that would annually produce 40,000 tonnes of nickel contained in a nickel sulphate product suitable for the battery sector. FPX does not disclose what cobalt price it assumes when it reduces the refinery OpEx with the cobalt and copper credits. The 300 tonnes of copper are meaningless, but 700 tonnes of cobalt dropping out as a mixed hydroxide product could be meaningful to a car maker using a battery that still requires cobalt, especially if being able to certify where it came from is important. The refinery is presented as an extra $448 million CapEx for a separate facility located in an urban setting where the talent needed to run a chemical plant is readily available. If you look closely at the refinery option numbers you can see the project NPV increases only $117 million from $2,010 million to $2,127 million while total CapEx swells to $2.67 billion, undermining the development hurdle that NPV should match or exceed CapEx. Furthermore, if the nickel sulphate refinery is presented as a standalone operation for a third party, its AT NPV of $117 million is woefully below the $448 million CapEx the third party would have to spend. The refinery option detracts from the economic value of the basic Decar mine producing ferro-nickel concentrate for the stainless steel market, and doesn't make much economic sense to an independent battery maker or battery precursor chemical company purchasing FPX's ferro-nickel concentrate at the $8.75/lb base case price. The inclusion of this economically non-sensical refinery option, however, is very important.
For whatever reason FPX chose not to spell out the annual nickel output for the two phases, quoting just 59,000 tpa LOM average, but by running the equation "operating rate x 365 days x grade x 88.7% recovery" for the 2 sets of operating rates and grades I get 47,203 tpa nickel output for Y1-10 and 67,133 tpa for years 11-29. What this means is that if the refinery option were developed at the proposed scale, and that would only happen with a hard offtake agreement that guarantees the refinery operator an annual ferro-nickel feed that contains 40,000 tonnes of nickel, during the first decade of production only 7,000 tonnes of nickel would be available for the stainless steel market.
FPX Nickel could have chosen any scale for the refinery option, but to choose this particular 40,000 tpa scale would have required external guidance. When FPX Nickel announced a $12 million investment by a mystery strategic investor last year CEO Martin Turenne let it be known that FPX would be listening to feedback of the mystery investor. Since there is no reason for a major mining company to be so secretive about a 9.9% equity stake in a company with a project it might eventually want to acquire and develop, nor for FPX management to need the wisdom of a mining company about how to build a basic open-pit mine yielding a ferro-nickel concentrate destined for the stainless steel market, and with nothing of technical importance possibly coming from the managers of a financial institution, it is fairly safe to conclude that the mystery investor is involved somewhere in the downstream supply chain of the EV sector, which could be a chemical precursor company, a battery maker, or even a car maker, of whom only the latter has any strategic need for secrecy about it backing a project that had not yet delivered a PFS.
This became more evident when this year FPX Nickel announced a $16 million investment by another strategic investor, this time Finland based Outokumpu, which specializes in producing relatively clean stainless steel for those markets which care about the ESG credentials of their inputs. The arrival of Outokumpu as a disclosed 9.9% strategic investor was a critical milestone, because a market concern has been that there might not be any stainless steel maker willing to utilize the Decar ferro-nickel concentrate, at least not without a deep payability discount. The PFS assumes that the nickel content of its ferro-nickel concentrate will be payable at 95% of the LME nickel price, even though Decar's nickel output will never pass through the LME or Shanghai refined nickel warehouses (the original Cliffs PEA assumed a much lower payability, though the concentrate was only 12% nickel compared to 60% today after FPX figured out how to apply a flotation circuit to the concentrate produced by magnetic separation). The Outokumpu financing grants the stainless steel maker an offtake right at market price for up to 7,500 tpa over 8 years at prevailing LME prices. Outokumpu would not have made its $16 million investment and asked for an offtake right if its due diligence had not confirmed that it can cost effectively work with the ferro-nickel concentrate. And since "cost-effective" is a function of what the stainless steel maker pays for the nickel feedstock, that 95% payability was probably worked out between FPX Nickel and Outokumpu before the deal was inked. Furthermore, given that Outokumpu could tap into global markets and secure nickel feedstock from any dirty source, possibly with a discount to the LME benchmark, asking for this benchmark linked right implies that Outokumpu sees economic and strategic value in having a nickel supply from Decar.
As I pointed out, the refinery option does not add much economic value to the PFS if a mining company were to build Decar, nor is it a rational proposition for a battery precursor chemical company. A more likely party to be interested in the sub-economic refinery option is a battery maker which will offset the low return from the nickel sulphate refinery through the markup it gets manufacturing batteries that include nickel in the cathode. Such a markup would not be vulnerable to accusations of "greenwashing" or geopolitical supply disruption.
There are, however, a number of battery makers and they face the risk that new battery configurations emerge with different metal inputs. The IEA, in its 2021 World Energy Outlook Special Report: The Role of Critical Minerals in Clean Energy Transitions, has a chart on slide 89 which shows how much of the different critical minerals each of the major lithium ion battery types requires. One of them is the lithium iron phosphate battery (LFP) which requires no nickel and less lithium than any of the other battery types. On slide 96 the IEA shows projections for 2020, 2030 and 2040 about the share it thinks the various battery types will represent for light duty (passenger cars) and heavy duty (trucks and buses) electric vehicles. The LFP battery is expected to gain only a fraction of the future light duty EV market but dominate the heavy duty EV market. Yet in 2023 we hear that the Chinese carmaker BYD is selling more LFP powered cars than the other battery types. And we hear that Tesla plans to offer LFP powered models to the American masses.
The LFP battery relies on graphite for the anode, which is why LFP cars are vastly inferior to a solid state lithium iron battery which uses lithium metal in the anode rather than graphite. In fact, in its 2023 report the IEA has switched to the view that the truck transport future beyond 2030 will be powered by hydrogen fuel cell technology, ironically, what Toyota has been working on at the expense of going beyond its hybrid offerings (Prius) into consumer EVs. So the question I ask, would a major battery maker be interested in making a strategic investment in a nickel project that will not be producing nickel before 2030?
I don't think a major battery maker would make a secret strategic investment in FPX Nickel to secure a future nickel supply unless it either possessed a killer battery technology that allows a solid state lithium ion battery to become reality, has a long term supply deal with a car maker determined to use a battery with nickel in the cathode in 2030 or beyond, or a relationship with a car maker that believes it has the key to a solid state lithium ion battery that still requires a meaningful nickel input for the cathode. That is why Toyota or a battery maker proxy remains my key suspect as the mystery investor. The NYT had an article on September 7, 2023 called Toyota, a Hybrid Pioneer, Struggles to Master Electric Vehicles which describes how Toyota is losing market share in China and North America because it has failed to provide a range of desirable EV models, choosing to stick to its hybrid offerings. Toyota has justified this stance by arguing that its hybrids have a lower carbon footprint than EVs and that current affordable battery technology just isn't good enough for wide scale adoption. That is why it was blockbuster news when a couple months ago Toyota boasted that it will begin selling a high end EV in 2027 with a 1,200 km range on a 10 minute charge made possibly through a solid state lithium ion battery which allows lithium metal to substitute for graphite in the anode. Toyota has not revealed what metals will be needed for the cathode, but if it still requires nickel, that has huge implications for FPX Nickel's Decar project.
Toyota is not going to salvage its shrinking car market share by offering an expensive competitor to the models Tesla currently sells in North America. It has dominated the car market with its Camry and Corolla models which the masses embrace because they are affordable and high quality. The solid state lithium ion battery breakthrough was not accomplished with a new configuration, but rather a manufacturing process breakthrough. The media tends to focus on the physical input costs for an EV which requires a much broader range of metals than an ICE car. The choice of the best battery configuration will be limited by the manufacturing cost. If a highly effective solid state lithium ion battery configuration has already been established, but is extremely expensive to make, then it is useless for the EV sector. But if Toyota has solved the manufacturing problem enough to offer a high end model by 2027, how long will it take before the manufacturing process has been further refined so as to make such a battery affordable to install in a Camry or Corolla? Is 2030, about the time when Decar should come on stream if its permitting cycle is not blockaded, a reasonable estimate for Toyota to launch a massive comeback with EV versions of its popular models built in Canada or the United States that blow away LFP powered cheap EVs? A lot of effort went into figuring out the refinery flow-sheet and the scale of the refinery option seems designed for a carmaker's future needs. We don't know what battery technologies will power cars in 2040 and beyond; it could even be the hydrogen fuel cells Toyota has been working on. But it is important that Baptiste is primarily a supplier to the stainless steel market and would continue to be so in 2040-2060 when it expands mining to 162,000 tpa, with an option to divert 85% of the first decade's nickel output to the battery sector.
Missing from the PFS news release is any talk about Decar being a clean source of nickel, other than the company pointing out that CO2 output will be 2.4 tonnes per tonne of nickel as a result of being able to use hydro power. That means the project as described is not achieving the holy grail of carbon neutrality. Concrete news about the carbon sequestration potential of the brucite rich tailings could stir future market interest. But, based on slide 196 in the 2021 IEA report, a 2.4 t CO2/t nickel footprint compares nicely to 11 tonnes CO2 for sulphide sourced nickel, 19 tonnes for HPAL processed laterite, and about 60 tonnes CO2 for matte nickel made via nickel pig iron, the primary production method used in Indonesia after massive investments by Chinese entities when Indonesia banned the export of raw laterite ore during the past decade. The Indonesian nickel is not only dirty because of its huge CO2 footprint, which is due to Indonesia's heavy reliance on coal powered electricity, but also because Indonesian nickel mines emit a lot of downstream pollution that hurts surrounding communities. Nickel sulphate from Decar would not only qualify for IRA subsidies because it is sourced from Canada which for now is deemed friendly by the United States, but also because the Decar nickel will have a certifiable chain of custody that would allow a car maker to plausibly claim ESG credentials for the nickel input. There will be no second-guessing questions that nickel sulphate made from refined sulphide concentrates ultimately came from the dirtiest nickel sulphide mine in the world operated by a country in the grip of a thug.
How does one convert the PFS outcome into a fair price for FPX Nickel Corp stock? Under the rational speculation model fair value is defined by the value of the expected outcome (the after tax net present value) multiplied by the certainty of that outcome. FPX has stated that the certainty of the PFS is plus or minus 25%. The project is now shifting to the permitting-feasibility study stage which is expected to lead to mine approval in 2027. The certainty ladder range for a project at this stage is 50%-75%, which is USD $1 billion to $1.5 billion or CAD $1.3 billion to $2 billion. Divide that by 258 million fully diluted shares and the fair value range is $5.00-$7.75 per share. The lower number reflects the 3 years Decar can expect to spend in the next stage of the exploration-development cycle. So why has the stock dropped a couple pennies to $0.38 since the PFS news where the market is assigning an implied value of only CAD $108 million to Decar?
The cloud hanging over the project is the Tl'atz'en Nation's unilateral declaration that its clearcut logged traditional territory is now sacred, and that it will not allow a mine to be built on it. On August 9, 2023 FPX Nickel announced that it was aware of a new development involving one of the First Nations groups with which it has had a cooperation agreement since 2012 and the stock tanked. Because of confidentiality agreements and a complex underlying turf war between different First Nation groups claiming overlapping "traditional territory" FPX is not in a position to shed light on the problem which I discussed in KW Episode August 11, 2023: Time for Canada to fix its First Nations Problem. Retail investors are spooked and institutional investors are too worried about China's slow motion implosion and the risk of a global recession arising from central bank monetary policies to take the resource sector seriously. FPX Nickel's strategic investors don't care because with $30 million working capital the company can fund all the permitting and engineering stuff required over the next couple years; their standstill agreements prevent them from buying stock in the open market. A potential competitor in the car or battery sector might want to secure a strategic equity stake, but probably will not do so by buying stock in the open market and triggering an upwards repricing of the stock to better reflect the implications of the PFS. The most obvious type of investor to take advantage of the Very Good Speculative Value offered by the current FPX Nickel stock price is a high net worth family office which doesn't have to explain its actions to anybody. But their eyes are on Ottawa where the Prime Minister has blathered a lot about critical minerals and climate change mitigation while at the same time encouraging Canada's First Nations to aggressively pursue their UNDRIP rights which in Canada involves asserting traditional territory control to 400% of the country (thanks to overlapping claims).
A recent Financial Times article wondered out loud why Canada, the second largest nation in the world by land mass, with a population similar to California but vastly better endowed with resources, ranks around 16th place in global GDP compared to fifth place for California. The failure of the federal and provincial government leaders to stand up and declare that local "stakeholder" objections will not stop Canada from becoming a major supplier of reasonably clean critical minerals so as to enable the 2050 net zero emissions goals to become reality is a key reason the market has shrugged at the PFS results. There is a growing sense that Canada has become a NoCanDo Nation.