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Daily KRO 2023 Favorites Report Publisher: Kaiser Research Online Author: Copyright 2023 John A. Kaiser
Daily Kaiser Research Favorites Report for June 2, 2023
(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
(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.
JK Moderates MIF Discussion Panel featuring Eric Coffin, Peter Krauth, Greg McCoach & Robert Sinn
